Joseph A. Rosenthal, and Herbert W. Mondros, Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, DE; Arthur N. Abby (argued), of Abbey Gardy, LLP, New York City; Schiffrin & Barroway, LLP, Bala Cynwyd, PA, of counsel, for Appellants.

Robert K. Payson, and Donald J. Wolfe, Jr., of Potter Anderson & Corroon, Wilmington, DE; David C. McBride (argued), and John J. Paschetto, of Young Conaway Stargatt & Taylor, LLP, Wilmington, DE; Paul K. Rowe, of Wachtell, Lipton, Rosen & Katz, New York City; Alan S. Goudiss, of Sherman & Sterling, New York City, of counsel, for Appellees.

[1033] Before VEASEY, Chief Justice, HOLLAND, BERGER, STEELE and JACOBS, Justices, constituting the Court en Banc.

[1032] VEASEY, Chief Justice:

Plaintiff-stockholders brought a purported class action in the Court of Chancery, alleging that the members of the board of directors of their corporation breached their fiduciary duties by agreeing to a 22-day delay in closing a proposed merger. Plaintiffs contend that the delay harmed them due to the lost time-value of the cash paid for their shares. The Court of Chancery granted the defendants' motion to dismiss on the sole ground that the claims were, "at most," claims of the corporation being asserted derivatively. They were, thus, held not to be direct claims of the stockholders, individually. Thereupon, the Court held that the plaintiffs lost their standing to bring this action when they tendered their shares in connection with the merger.

Although the trial court's legal analysis of whether the complaint alleges a direct or derivative claim reflects some concepts in our prior jurisprudence, we believe those concepts are not helpful and should be regarded as erroneous. We set forth in this Opinion the law to be applied henceforth in determining whether a stockholder's claim is derivative or direct. That issue must turn solely on the following questions: (1) who suffered the alleged harm (the corporation or the suing stock-holders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stock-holders, individually)?

To the extent we have concluded that the trial court's analysis of the direct vs. derivative dichotomy should be regarded as erroneous, we view the error as harmless in this case because the complaint does not set forth any claim upon which relief can be granted. In its opinion, the Court of Chancery properly found on the facts pleaded that the plaintiffs have no separate contractual right to the alleged lost time-value of money arising out of extensions in the closing of a tender offer. These extensions were made in connection with a merger where the plaintiffs' right to any payment of the merger consideration had not ripened at the time the extensions were granted. No other individual right of these stockholders having been asserted in the complaint, it was correctly dismissed.

In affirming the judgment of the trial court as having correctly dismissed the complaint, we reverse only its dismissal with prejudice.^[1] We remand this action to the Court of Chancery with directions to amend its order of dismissal to provide that: (a) the action is dismissed for failure to state a claim upon which relief can be granted; and (b) that the dismissal is without prejudice. Thus, plaintiffs will have an opportunity to replead, if warranted under Court of Chancery Rule 11.

Facts

Patrick Tooley and Kevin Lewis are former minority stockholders of Donaldson, Lufkin & Jenrette, Inc. (DLJ), a Delaware corporation engaged in investment banking. DLJ was acquired by Credit Suisse Group (Credit Suisse) in the Fall of 2000. Before that acquisition, AXA Financial, Inc.(AXA), which owned 71% of DLJ stock, controlled DLJ. Pursuant to a stockholder agreement between AXA and Credit Suisse, AXA agreed to exchange with Credit Suisse its DLJ stockholdings for a mix of stock and cash. The consideration [1034] received by AXA consisted primarily of stock. Cash made up one-third of the purchase price. Credit Suisse intended to acquire the remaining minority interests of publicly-held DLJ stock through a cash tender offer, followed by a merger of DLJ into a Credit Suisse subsidiary.

The tender offer price was set at $90 per share in cash. The tender offer was to expire 20 days after its commencement. The merger agreement, however, authorized two types of extensions. First, Credit Suisse could unilaterally extend the tender offer if certain conditions were not met, such as SEC regulatory approvals or certain payment obligations. Alternatively, DLJ and Credit Suisse could agree to postpone acceptance by Credit Suisse of DLJ stock tendered by the minority stockholders.

Credit Suisse availed itself of both types of extensions to postpone the closing of the tender offer. The tender offer was initially set to expire on October 5, 2000, but Credit Suisse invoked the five-day unilateral extension provided in the agreement. Later, by agreement between DLJ and Credit Suisse, it postponed the merger a second time so that it was then set to close on November 2, 2000.

Plaintiffs challenge the second extension that resulted in a 22-day delay. They contend that this delay was not properly authorized and harmed minority stockholders while improperly benefitting AXA. They claim damages representing the time-value of money lost through the delay.

The Decision of the Court of Chancery

The order of the Court of Chancery dismissing the complaint, and the Memorandum Opinion upon which it is based,^[2] state that the dismissal is based on the plaintiffs' lack of standing to bring the claims asserted therein. Thus, when plaintiffs tendered their shares, they lost standing under Court of Chancery Rule 23.1, the contemporaneous holding rule. The ruling before us on appeal is that the plaintiffs' claim is derivative, purportedly brought on behalf of DLJ. The Court of Chancery, relying upon our confusing jurisprudence on the direct/derivative dichotomy, based its dismissal on the following ground: "Because this delay affected all DLJ shareholders equally, plaintiffs' injury was not a special injury, and this action is, thus, a derivative action, at most."^[3]

Plaintiffs argue that they have suffered a "special injury" because they had an alleged contractual right to receive the merger consideration of $90 per share without suffering the 22-day delay arising out of the extensions under the merger agreement. But the trial court's opinion convincingly demonstrates that plaintiffs had no such contractual right that had ripened at the time the extensions were entered into:

Here, it is clear that plaintiffs have no separate contractual right to bring a direct claim, and they do not assert contractual rights under the merger agreement. First, the merger agreement specifically disclaims any persons as being third party beneficiaries to the contract. Second, any contractual shareholder right to payment of the merger consideration did not ripen until the conditions of the agreement were met. The agreement stated that Credit Suisse Group was not required to accept any shares for tender, or could extend the offer, under certain conditions — one condition of which included an extension or termination by agreement between [1035] Credit Suisse Group and DLJ. Because Credit Suisse Group and DLJ did in fact agree to extend the tender offer period, any right to payment plaintiffs could have did not ripen until this newly negotiated period was over. The merger agreement only became binding and mutually enforceable at the time the tendered shares ultimately were accepted for payment by Credit Suisse Group. It is at that moment in time, November 3, 2000, that the company became bound to purchase the tendered shares, making the contract mutually enforceable. DLJ stockholders had no individual contractual right to payment until November 3, 2000, when their tendered shares were accepted for payment. Thus, they have no contractual basis to challenge a delay in the closing of the tender offer up until November 3. Because this is the date the tendered shares were accepted for payment, the contract was not breached and plaintiffs do not have a contractual basis to bring a direct suit.^[4]

Moreover, no other individual right of these stockholder-plaintiffs was alleged to have been violated by the extensions.

That conclusion could have ended the case because it portended a definitive ruling that plaintiffs have no claim whatsoever on the facts alleged. But the defendants chose to argue, and the trial court chose to decide, the standing issue, which is predicated on an assertion that this claim is a derivative one asserted on behalf of the corporation, DLJ.

The Court of Chancery correctly noted that "[t]he Court will independently examine the nature of the wrong alleged and any potential relief to make its own determination of the suit's classification.... Plaintiffs' classification of the suit is not binding."^[5] The trial court's analysis was hindered, however, because it focused on the confusing concept of "special injury" as the test for determining whether a claim is derivative or direct. The trial court's premise was as follows:

In order to bring a direct claim, a plaintiff must have experienced some "special injury." [citing Lipton v. News Int'l, 514 A.2d 1075, 1079 (Del.1986)]. A special injury is a wrong that "is separate and distinct from that suffered by other shareholders, ... or a wrong involving a contractual right of a shareholder, such as the right to vote, or to assert majority control, which exists independently of any right of the corporation." [citing Moran v. Household Int'l. Inc., 490 A.2d 1059, 1070 (Del.Ch.1985), aff'd 500 A.2d 1346 (Del.1986 [1985])].^[6]

In our view, the concept of "special injury" that appears in some Supreme Court and Court of Chancery cases is not helpful to a proper analytical distinction between direct and derivative actions. We now disapprove the use of the concept of "special injury" as a tool in that analysis.

The Proper Analysis to Distinguish Between Direct and Derivative Actions

The analysis must be based solely on the following questions: Who suffered the alleged harm — the corporation or the suing stockholder individually — and who would receive the benefit of the recovery or other remedy? This simple analysis is well imbedded in our jurisprudence,^[7] but some cases have complicated it by injection of the amorphous and confusing concept of "special injury."

[1036] The Chancellor, in the very recent Agostino case,^[8] correctly points this out and strongly suggests that we should disavow the concept of "special injury." In a scholarly analysis of this area of the law, he also suggests that the inquiry should be whether the stockholder has demonstrated that he or she has suffered an injury that is not dependent on an injury to the corporation. In the context of a claim for breach of fiduciary duty, the Chancellor articulated the inquiry as follows: "Looking at the body of the complaint and considering the nature of the wrong alleged and the relief requested, has the plaintiff demonstrated that he or she can prevail without showing an injury to the corporation?"^[9] We believe that this approach is helpful in analyzing the first prong of the analysis: what person or entity has suffered the alleged harm? The second prong of the analysis should logically follow.

A Brief History of Our Jurisprudence

The derivative suit has been generally described as "one of the most interesting and ingenious of accountability mechanisms for large formal organizations."^[10] It enables a stockholder to bring suit on behalf of the corporation for harm done to the corporation.^[11] Because a derivative suit is being brought on behalf of the corporation, the recovery, if any, must go to the corporation. A stockholder who is directly injured, however, does retain the right to bring an individual action for injuries affecting his or her legal rights as a stockholder. Such a claim is distinct from an injury caused to the corporation alone. In such individual suits, the recovery or other relief flows directly to the stockholders, not to the corporation.

Determining whether an action is derivative or direct is sometimes difficult and has many legal consequences, some of which may have an expensive impact on the parties to the action.^[12] For example, if an action is derivative, the plaintiffs are then required to comply with the requirements of Court of Chancery Rule 23.1, that the stockholder: (a) retain ownership of the shares throughout the litigation; (b) make presuit demand on the board; and (c) obtain court approval of any settlement. Further, the recovery, if any, flows only to the corporation. The decision whether a suit is direct or derivative may be out-come-determinative. Therefore, it is necessary that a standard to distinguish such actions be clear, simple and consistently articulated and applied by our courts.

In Elster v. American Airlines, Inc.,^[13] the stockholder sought to enjoin the grant and exercise of stock options because they [1037] would result in a dilution of her stock personally. In Elster, the alleged injury was found to be derivative, not direct, because it was essentially a claim of mismanagement of corporate assets. Then came the complication in the analysis: The Court held that where the alleged injury is to both the corporation and to the stockholder, the stockholder must allege a "special injury" to maintain a direct action. The Court did not define "special injury," however. By implication, decisions in later cases have interpreted Elster to mean that a "special injury" is alleged where the wrong is inflicted upon the stockholder alone or where the stockholder complains of a wrong affecting a particular right. Examples would be a preemptive right as a stockholder, rights involving control of the corporation or a wrong affecting the stockholder, qua individual holder, and not the corporation.^[14]

In Bokat v. Getty Oil Co.,^[15] a stockholder of a subsidiary brought suit against the director of the parent corporation for causing the subsidiary to invest its resources wastefully, resulting in a loss to the subsidiary.^[16] The claim in Bokat was essentially for mismanagement of corporate assets. Therefore, the Court held that any recovery must be sought on behalf of the corporation, and the claim was, thus, found to be derivative.

In describing how a court may distinguish direct and derivative actions, the Bokat Court stated that a suit must be maintained derivatively if the injury falls equally upon all stockholders. Experience has shown this concept to be confusing and inaccurate. It is confusing because it appears to have been intended to address the fact that an injury to the corporation tends to diminish each share of stock equally because corporate assets or their value are diminished. In that sense, the indirect injury to the stockholders arising out of the harm to the corporation comes about solely by virtue of their stockholdings. It does not arise out of any independent or direct harm to the stockholders, individually. That concept is also inaccurate because a direct, individual claim of stockholders that does not depend on harm to the corporation can also fall on all stockholders equally, without the claim thereby becoming a derivative claim.

In Lipton v. News International, Plc.,^[17] this Court applied the "special injury" test. There, a stockholder began acquiring shares in the defendant corporation presumably to gain control of the corporation. In response, the defendant corporation agreed to an exchange of its shares with a friendly buyer. Due to the exchange and a supermajority voting requirement on certain stockholder actions, the management of the defendant corporation acquired a veto power over any change in management.

The Lipton Court concluded that the critical analytical issue in distinguishing direct and derivative actions is whether a "special injury" has been alleged. There, the Court found a "special injury" because the board's manipulation worked an injury upon the plaintiff-stockholder unlike the injury suffered by other stockholders. That was because the plaintiff-stockholder was actively seeking to gain control of the [1038] defendant corporation.^[18] Therefore, the Court found that the claim was direct. Ironically, the Court could have reached the same correct result by simply concluding that the manipulation directly and individually harmed the stockholders, without injuring the corporation.

In Kramer v. Western Pacific Industries, Inc.,^[19] this Court found to be derivative a stockholder's challenge to corporate transactions that occurred six months immediately preceding a buy-out merger. The stockholders challenged the decision by the board of directors to grant stock options and golden parachutes to management. The stockholders argued that the claim was direct because their share of the proceeds from the buy-out sale was reduced by the resources used to pay for the options and golden parachutes. Once again, our analysis was that to bring a direct action, the stockholder must allege something other than an injury resulting from a wrong to the corporation. We interpreted Elster to require the court to determine the nature of the action based on the "nature of the wrong alleged" and the relief that could result.^[20] That was, and is, the correct test. The claim in Kramer was essentially for mismanagement of corporate assets. Therefore, we found the claims to be derivative. That was the correct outcome.^[21]

In Grimes v. Donald,^[22] we sought to distinguish between direct and derivative actions in the context of employment agreements granted to certain officers that allegedly caused the board to abdicate its authority. Relying on the Elster and Kramer precedents that the court must look to the nature of the wrong and to whom the relief will go,^[23] we concluded that the plaintiff was not seeking to recover any damages for injury to the corporation. Rather, the plaintiff was seeking a declaration of the invalidity of the agreements on the ground that the board had abdicated its responsibility to the stockholders.^[24] Thus, based on the relief requested, we affirmed the judgment of the Court of Chancery that the plaintiff was entitled to pursue a direct action.

Grimes was followed by Parnes v. Bally Entertainment Corp., which held, among other things, that the injury to the stockholders must be "independent of any injury to the corporation."^[25] As the Chancellor correctly noted in Agostino, neither Grimes nor Parnes applies the purported "special injury" test.^[26]

Thus, two confusing propositions have encumbered our caselaw governing the direct/derivative distinction. The "special injury" concept, applied in cases such as Lipton, can be confusing in identifying the nature of the action. The same is true of the proposition that stems from Bokat — that an action cannot be direct if all stockholders are equally affected or unless the [1039] stockholder's injury is separate and distinct from that suffered by other stockholders. The proper analysis has been and should remain that stated in Grimes; Kramer and Parnes. That is, a court should look to the nature of the wrong and to whom the relief should go. The stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.

Standard to Be Applied in This Case

In this case it cannot be concluded that the complaint alleges a derivative claim. There is no derivative claim asserting injury to the corporate entity. There is no relief that would go the corporation. Accordingly, there is no basis to hold that the complaint states a derivative claim.

But, it does not necessarily follow that the complaint states a direct, individual claim. While the complaint purports to set forth a direct claim, in reality, it states no claim at all. The trial court analyzed the complaint and correctly concluded that it does not claim that the plaintiffs have any rights that have been injured.^[27] Their rights have not yet ripened. The contractual claim is nonexistent until it is ripe, and that claim will not be ripe until the terms of the merger are fulfilled, including the extensions of the closing at issue here. Therefore, there is no direct claim stated in the complaint before us.

Accordingly, the complaint was properly dismissed. But, due to the reliance on the concept of "special injury" by the Court of Chancery, the ground set forth for the dismissal is erroneous, there being no derivative claim. That error is harmless, however, because, in our view, there is no direct claim either.

Conclusion

For purposes of distinguishing between derivative and direct claims, we expressly disapprove both the concept of "special injury" and the concept that a claim is necessarily derivative if it affects all stockholders equally. In our view, the tests going forward should rest on those set forth in this opinion.

We affirm the judgment of the Court of Chancery dismissing the complaint, although on a different ground from that decided by the Court of Chancery. We reverse the dismissal with prejudice and remand this matter to the Court of Chancery to amend the order of dismissal: (a) to state that the complaint is dismissed on the ground that it does not state a claim upon which relief can be granted; and (b) that the dismissal is without prejudice.

Because our determination that there is no valid claim whatsoever in the complaint before us was not argued^[28] by the defendants and was not the basis of the ruling of the Court of Chancery,^[29] the interests of justice will be best served if the dismissal is without prejudice, and plaintiffs have an opportunity to replead if they have a basis [1040] for doing so under Court of Chancery Rule 11. This result — permitting plaintiffs to replead — is unusual, but not unprecedented.^[30]

It is ordered that the time within which a motion for reargument may be timely filed under Supreme Court Rule 18 is shortened to five days from the date of this opinion. This is due to the impending change in the composition of the Supreme Court, arising from the retirement of the Chief Justice in April 2004.

[1] Since the order of dismissal here did not state that it was without prejudice, it is deemed to operate as an adjudication upon the merits. See Court of Chancery Rule 41(b)(2).

[2] Tooley v. Donaldson Lufkin and Jenrette, No. Civ. A. 18414-NC, 2003 WL 203060 (Del.Ch. Jan. 21, 2003).

[3] Id. at *4.

[4] Id. at *3 (footnotes omitted (emphasis added)).

[5] Id.

[6] Id.

[7] See, e.g., Kramer v. Western Pacific Industries, Inc., 546 A.2d 348 (Del.1988).

[8] Agostino v. Hicks, No. Civ. A. 20020-NC, 2004 WL 443987 (Del.Ch. March 11, 2004).

[9] Agostino, 2004 WL 443987, at * 7. The Chancellor further explains that the focus should be on the person or entity to whom the relevant duty is owed. Id. at *7 n. 54. As noted in Agostino, id., this test is similar to that articulated by the American Law Institute (ALI), a test that we cited with approval in Grimes v. Donald, 673 A.2d 1207 (Del. 1996). The ALI test is as follows:

A direct action may be brought in the name and right of a holder to redress an injury sustained by, or enforce a duty owed to, the holder. An action in which the holder can prevail without showing an injury or breach of duty to the corporation should be treated as a direct action that may be maintained by the holder in an individual capacity.

2 American Law Institute, PRINCIPLES OF CORPORATE GOVERNANCE ANALYSIS AND RECOMMENDATIONS § 7.01(b) at 17.

[10] Kramer v. Western Pacific Industries, Inc., 546 A.2d at 351 (quoting R. Clark, Corporate Law 639-40 (1986)).

[11] Id.

[12] Grimes v. Donald, 673 A.2d at 1213 (Del. 1996).

[13] 100 A.2d 219, 222 (Del.Ch.1953).

[14] See Lipton v. News International, Plc., 514 A.2d 1075, 1078 (Del.1986); Moran v. Household International Inc., 490 A.2d 1059, 1069-70 (Del.Ch.1985) (to distinguish a direct and derivative action, injury must be separate and distinct from that suffered by other stockholders or involve a contractual right independent of the corporation).

[15] 262 A.2d 246 (Del.1970).

[16] Id. at 249.

[17] Lipton, 514 A.2d at 1078.

[18] Id.

[19] 546 A.2d 348, 352 (Del.1988).

[20] Id.

[21] In the Tri-Star case, however, this Court lapsed back into the "special injury" concept, which we now discard. In re Tri-Star Pictures, Inc. Litigation, 634 A.2d 319, 330 (1993).

[22] 673 A.2d 1207, 1213 (Del.1996).

[23] Elster, 100 A.2d at 221-23; Kramer, 546 A.2d at 351. See also John W. Welch, Shareholder Individual and Derivative Actions: Underlying Rationales and the Closely Held Corporation, 9 J. Corp. L. 147, 160 (1984) (stating that courts should analyze the rights involved to determine whether the action is direct or derivative).

[24] Grimes, 673 A.2d at 1213.

[25] 722 A.2d 1243, 1245 (Del.1999).

[26] Agostino, 2004 WL 443987, at *6 n. 49.

[27] Tooley, 2003 WL 203060, at *3.

[28] As we have noted, the opinion of the trial court clearly stated that plaintiffs did not have a contractual right that had ripened. Tooley, 2003 WL 203060, at *3. On appeal, appellees cited twice to the trial court's conclusion that there was no contractual right, but it was in the context of the derivative/direct claim issue. (Appellees' Answering Brief at pp. 3, 17-18). On appeal, plaintiffs-appellants do not challenge the trial court's finding. Moreover, inexplicably, plaintiffs-appellants filed no reply brief in this Court.

[29] See, Unitrin, Inc. v. American General Corp., 651 A.2d 1361, 1390 (Del.1995) (decision of Supreme Court reversing trial court based on different grounds than that argued on appeal).

[30] Compare Brehm v. Eisner, 746 A.2d 244, 267 (Del.1999) (permitting plaintiffs to proceed because of the unique circumstances noted there), with White v. Panic, 783 A.2d 543, 556 (Del.2001) (declining to permit plaintiffs to replead, there being no circumstances justifying such action).

Pamela S. Tikellis, Robert J. Kriner and Tiffany J. Cramer, of CHIMICLES & TIKELLIS LLP, Wilmington, Delaware; OF COUNSEL: John F. Harnes, Gregory E. Keller and Carol S. Shahmoon, of CHITWOOD HARLEY HARNES LLP, Great Neck, New York, Attorneys for Plaintiffs.

Gregory V. Varallo and Rudolf Koch, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Gandolfo V. DiBlasi, Richard H. Klapper, Theodore Edelman and David M.J. Rein, of SULLIVAN & CROMWELL LLP, New York, New York, Attorneys for Defendants.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor.

The Delaware General Corporation Law is, for the most part, enabling in nature. It provides corporate directors and officers with broad discretion to act as they find appropriate in the conduct of corporate affairs. It is therefore left to Delaware case law to set a boundary on that otherwise unconstrained realm of action. The restrictions imposed by Delaware case law set this boundary by requiring corporate officers and directors to act as faithful fiduciaries to the corporation and its stockholders. Should these corporate actors perform in such a way that they are violating their fiduciary obligations—their core duties of care or loyalty—their faithless acts properly become the subject of judicial action in vindication of the rights of the stockholders. Within the boundary of fiduciary duty, however, these corporate actors are free to pursue corporate opportunities in any way that, in the exercise of their business judgment on behalf of the corporation, they see fit. It is this broad freedom to pursue opportunity on behalf of the corporation, in the myriad ways that may be revealed to creative human minds, that has made the corporate structure a supremely effective engine for the production of wealth. Exercising that freedom is precisely what directors and officers are elected by their shareholders to do. So long as such individuals act within the boundaries of their fiduciary duties, judges are ill-suited by training (and should be disinclined by temperament) to second-guess the business decisions of those chosen by the stockholders to fulfill precisely that function. This case, as in so many corporate matters considered by this Court, involves whether actions taken by certain director defendants fall outside of the fiduciary boundaries existing under Delaware case law—and are therefore subject to judicial oversight—or whether the acts complained of are within those broad boundaries, where a law-trained judge should refrain from acting.

This matter is before me on a motion to dismiss, pursuant to Court of Chancery Rule 23.1, for failure to make a pre-suit demand upon the board, and Court of Chancery Rule 12(b)(6) for failure to state a claim. The Plaintiffs contend that Goldman's compensation structure created a divergence of interest between Goldman's management and its stockholders. The Plaintiffs allege that because Goldman's directors have consistently based compensation for the firm's management on a percentage of net revenue, Goldman's employees had a motivation to grow net revenue at any cost and without regard to risk.

The Plaintiffs allege that under this compensation structure, Goldman's employees would attempt to maximize short-term profits, thus increasing their bonuses at the expense of stockholders' interests. The Plaintiffs contend that Goldman's employees would do this by engaging in highly risky trading practices and by over-leveraging the company's assets. If these practices turned a profit, Goldman's employees would receive a windfall; however, losses would fall on the stockholders.

The Plaintiffs allege that the Director Defendants breached their fiduciary duties by approving the compensation structure discussed above. Additionally, the Plaintiffs claim that the payments under this compensation structure constituted corporate waste. Finally, the Plaintiffs assert that this compensation structure led to overly-risky business decisions and unethical and illegal practices, and that the Director Defendants failed to satisfy their oversight responsibilities with regard to those practices.

The Defendants seek dismissal of this action on the grounds that the Plaintiffs have failed to make a pre-suit demand on the board and have failed to state a claim. For the reasons stated below, I find that the Plaintiffs' complaint must be dismissed.

I. FACTS

The facts below are taken from the second amended complaint. All reasonable inferences are drawn in the Plaintiffs' favor.^[1]

A. Parties

Co-Lead plaintiffs Southeastern Pennsylvania Transportation Authority and International Brotherhood of Electrical Workers Local 98 Pension Fund ("the Plaintiffs") are stockholders of Goldman Sachs Group, Inc. ("Goldman"), and have continuously held Goldman stock during all relevant times.

Defendant Goldman is a global financial services firm which provides investment banking, securities, and investment management services to consumers, businesses, and governments. Goldman is a Delaware corporation with its principal executive offices in New York, NY.

The complaint also names fourteen individual current and former directors and officers of Goldman as defendants: Lloyd C. Blankfein, Gary D. Cohn, John H. Bryan, Claes Dahlback, Stephen Friedman, William W. George, Rajat K. Gupta, James A. Johnson, Lois D. Juliber, Lakshmi N. Mittal, James J. Schiro, Ruth J. Simmons, David A. Viniar, and J. Michael Evans (together with Goldman, "the Defendants").

Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal, Schiro, and Simmons are current and former directors of Goldman, and are collectively referred to as the "Director Defendants." Evans and Viniar are officers of the company; Evans, Viniar, Cohn, and Blankfein are collectively referred to as the "Executive Officer Defendants." Bryan, Dahlback, Friedman, George, Gutpa, Johnson, Juliber, Mittal, and Schiro served as members of the Board's Audit Committee (collectively, the "Audit Committee Defendants"). Finally, defendants Byran, Dahlback, Friedman, George, Gutpa, Johnson, Juliber, Mittal, Schiro, and Simmons served as members of the Board's Compensation Committee, and are collectively referred to as the "Compensation Committee Defendants."

B. Background

Goldman engages in three principal business segments: investment banking, asset management and securities services, and trading and principal investments. The majority of Goldman's revenue comes from the trading and principal investment segment.^[2] In that segment Goldman engages in market making, structuring and entering into a variety of derivative transactions, and the proprietary trading of financial instruments.^[3]

Since going public in 1999, Goldman's total assets under management and common stockholder equity have substantially increased.^[4] In 1999, Goldman had $258 billion of assets under management and $10 billion of common shareholder equity.^[5] By 2010, those numbers had grown to $881 billion of assets under management and $72.94 billion of common shareholder equity.^[6] Corresponding with this increase in assets under management and common shareholder equity was a hike in the percentage of Goldman's revenue that was generated by the trading and principal investment segment.^[7] In 1999, the trading and principal investment segment generated 43% of Goldman's revenue; by 2007 the segment generated over 76% of Goldman's revenue.^[8]

As the revenue generated by the trading and principal investment segment grew, so did the trading department's stature within Goldman. The traders "became wealthier and more powerful in the bank."^[9] The Plaintiffs allege that the compensation for these traders was not based on performance and was unjustifiable because Goldman was doing "nothing more than compensat[ing] employees for results produced by the vast amounts of shareholder equity that Goldman ha[d] available to be deployed."^[10]

C. Compensation

Goldman employed a "pay for performance" philosophy linking the total compensation of its employees to the company's performance.^[11] Goldman has used a Compensation Committee since at least 2006 to oversee the development and implementation of its compensation scheme.^[12] The Compensation Committee was responsible for reviewing and approving the Goldman executives' annual compensation.^[13] To fulfill their charge, the Compensation Committee consulted with senior management about management's projections of net revenues and the proper ratio of compensation and benefits expenses to net revenues (the "compensation ratio").^[14] Additionally, the Compensation Committee compared Goldman's compensation ratio to that of Goldman's competitors such as Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley. The Compensation Committee would then approve a ratio and structure that Goldman would use to govern Goldman's compensation to its employees.^[15]

The Plaintiffs allege that from 2007 through 2009, the Director Defendants approved a management-proposed compensation structure that caused management's interests to diverge from those of the stockholders.^[16] According to the Plaintiffs, in each year since 2006 the Compensation Committee approved the management-determined compensation ratio, which governed "the total amount of funds available to compensate all employees including senior executives," without any analysis.^[17] Although the total compensation paid by Goldman varied significantly each year, total compensation as a percentage of net revenue remained relatively constant.^[18] Because management was awarded a relatively constant percentage of total revenue, management could maximize their compensation by increasing Goldman's total net revenue and total stockholder equity.^[19] The Plaintiffs contend that this compensation structure led management to pursue a highly risky business strategy that emphasized short term profits in order to increase their yearly bonuses.^[20]

D. Business Risk

The Plaintiffs allege that management achieved Goldman's growth "through extreme leverage and significant uncontrolled exposure to risky loans and credit risks."^[21] The trading and principal investment segment is the largest contributor to Goldman's total revenues; it is also the segment to which Goldman commits the largest amount of capital.^[22] The Plaintiffs argue that this was a risky use of Goldman's assets, pointing out that Goldman's Value at Risk (VAR) increased between 2007 and 2009, and that in 2007 Goldman had a leverage ratio of 25 to 1, exceeding that of its peers.^[23]

The Plaintiffs charge that this business strategy was not in the best interest of the stockholders, in part, because the stockholders did not benefit to the same degree that management did. Stockholders received roughly 2% of the revenue generated in the form of dividends—but if the investment went south, it was the stockholders' equity at risk, not that of the traders.

The Plaintiffs point to Goldman's performance in 2008 as evidence of these alleged diverging interests. In that year, "the Trading and Principal Investment segment produced $9.06 billion in net revenue, but as a result of discretionary bonuses paid to employees lost more than $2.7 billion."^[24] This contributed to Goldman's 2008 net income falling by $9.3 billion.^[25] The Plaintiffs contend that, but for a cash infusion from Warren Buffet, federal government intervention and Goldman's conversion into a bank holding company, Goldman would have gone into bankruptcy.^[26]

The Plaintiffs acknowledge that during this time Goldman had an Audit Committee in charge of overseeing risk.^[27] The Audit Committee's purpose was to assist the board in overseeing "the Company's management of market, credit, liquidity, and other financial and operational risks."^[28] The Audit Committee was also required to review, along with management, the financial information that was provided to analysts and ratings agencies and to discuss "management's assessment of the Company's market, credit, liquidity and other financial and operational risks, and the guidelines, policies and processes for managing such risks."^[29]

In addition to having an Audit Committee in place, Goldman managed risk associated with the trading and principal investment section by hedging its positions—sometimes taking positions opposite to the clients that it was investing with, advising, and financing.^[30] Since 2002, Goldman has acknowledged that possible conflicts could occur and that it seeks to "manage" these conflicts.^[31] The Plaintiffs allege that if the Audit Committee had been properly functioning, the board should have been forewarned about conflicts of interest between Goldman and its clients.^[32]

The Plaintiffs contend that these conflicts of interest came to a head during the mortgage and housing crisis. In December 2006, Goldman's CFO, in a meeting with Goldman's mortgage traders and risk managers, concluded that the firm was over-exposed to the subprime mortgage market and decided to reduce Goldman's overall exposure.^[33] In 2007, as the housing market began to decline, a committee of senior executives, including Viniar, Cohn, and Blankfein, took an active role in monitoring and overseeing the mortgage unit.^[34] The committee's job was to examine mortgage products and transactions while protecting Goldman against risky deals.^[35] The committee eventually decided to take positions that would allow Goldman to profit if housing prices declined.^[36] When the subprime mortgage markets collapsed, not only were Goldman's long positions hedged, Goldman actually profited more from its short positions than it lost from its long positions.^[37] The Plaintiffs allege that Goldman's profits resulted from positions that conflicted with its clients' interests to the detriment of the company's reputation.^[38]

As an example of these conflicts of interest, the Plaintiffs point to the infamous Abacus transaction. In the Abacus transaction, hedge fund manager John Paulson, a Goldman client, had a role in selecting the mortgages that would ultimately be used to back a collateralized debt obligation (CDO).^[39] Paulson took a short position that would profit if the CDO fell in value.^[40] Goldman sold the long positions to other clients without disclosing Paulson's involvement.^[41] On April 16, 2010, the SEC charged Goldman and a Goldman employee with fraud for their actions related to the Abacus transaction.^[42] On July 14, 2010, Goldman settled the case with the SEC and agreed to pay a civil penalty of $535 million and to disgorge the $15 million in profits it made on the transaction.^[43] Goldman also agreed to review its internal processes related to mortgage securities transactions.^[44]

To demonstrate further examples of conflicts of interest, the Plaintiffs rely on a April 26, 2010 memorandum, from Senators Carl Levin and Tom Coburn to the Members of the Permanent Subcommittee on Investigations, entitled "Wall Street and the Financial Crisis: The Role of Investment Banks" ("Permanent Subcommittee Report"), that highlighted three mortgage-related products that Goldman sold to its clients.^[45] These transactions involved synthetic CDOs,^[46] where Goldman sold long positions to clients while Goldman took the short positions.^[47] Unlike the Abacus transaction, these three transactions did not end with SEC involvement,^[48] but the Plaintiffs allege that investors who lost money are "reviewing their options, including possibly bringing lawsuits."^[49]

E. The Plaintiffs' Claims

The Plaintiffs allege that the Director Defendants breached their fiduciary duties by (1) failing to properly analyze and rationally set compensation levels for Goldman's employees and (2) committing waste by "approving a compensation ratio to Goldman employees in an amount so disproportionately large to the contribution of management, as opposed to capital as to be unconscionable."^[50]

The Plaintiffs also allege that the Director Defendants violated their fiduciary duties by failing to adequately monitor Goldman's operations and by "allowing the Firm to manage and conduct the Firm's trading in a grossly unethical manner."^[51]

II. LEGAL STANDARDS

The Plaintiffs have brought this action derivatively on behalf of Goldman "to redress the breaches of fiduciary duty and other violations of law by [the] Defendants."^[52] The Defendants have moved to dismiss, pursuant to Court of Chancery Rule 23.1, for failure to make a pre-suit demand upon the board, and Court of Chancery Rule 12(b)(6) for failure to state a claim.

A. Rule 12(b)(6)

As our Supreme Court has recently made clear, "the governing pleading standard in Delaware to survive a motion to dismiss is reasonable `conceivability.'"<sup>[53]</sup> Under this minimal standard, when considering a motion to dismiss, the trial court must accept "even vague allegations in the Complaint as `well-pleaded' if they provide the defendant notice of the claim."^[54] The trial court must "draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof."^[55] This is true even if, "as a factual matter," it may "ultimately prove impossible for the plaintiff to prove his claims at a later stage of a proceeding."^[56]

B. Rule 23.1

"[T]he pleading burden imposed by Rule 23.1 . . . is more onerous than that demanded by Rule 12(b)(6)."^[57] Though a complaint may plead a "conceivable" allegation that would survive a motion to dismiss under Rule 12(b)(6), "vague allegations are . . . insufficient to withstand a motion to dismiss pursuant to Rule 23.1."^[58] This difference reflects the divergent reasons for the two rules: Rule 12(b)(6) is designed to ensure a decision on the merits of any potentially valid claim, excluding only clearly meritless claims; Rule 23.1 is designed to vindicate the authority of the corporate board, except in those cases where the board will not or (because of conflicts) cannot exercise its judgment in the interest of the corporation. Rule 23.1 requires that "a plaintiff shareholder . . . make a demand upon the corporation's current board to pursue derivative claims owned by the corporation before a shareholder is permitted to pursue legal action on the corporation's behalf."^[59] Demand is required because "[t]he decision whether to initiate or pursue a lawsuit on behalf of the corporation is generally within the power and responsibility of the board of directors."^[60] Accordingly, the complaint must 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."^[61]

C. Demand Futility

If, as here, a stockholder does not first demand that the directors pursue the alleged cause of action, he must establish that demand is excused by satisfying "stringent [pleading] requirements of factual particularity" by "set[ting] forth particularized factual statements that are essential to the claim" in order to demonstrate that making demand would be futile.^[62] Pre-suit demand is futile if a corporation's board is "deemed incapable of making an impartial decision regarding the pursuit of the litigation."^[63]

Under the two-pronged test, first explicated in Aronson, when a plaintiff challenges a conscious decision of the board, a plaintiff can show demand futility by alleging particularized facts that create a reasonable doubt that either (1) the directors are disinterested and independent or (2) "the challenged transaction was otherwise the product of a valid exercise of business judgment."^[64]

On the other hand, when a plaintiff complains of board inaction, "there is no `challenged transaction,' and the ordinary Aronson analysis does not apply."^[65] Instead, the board's inaction is analyzed under Rales v. Blasband.^[66] Under the Rales test, a plaintiff must plead particularized facts 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."^[67]

Here, the Plaintiffs concede that they have not made demand upon Goldman's board of directors, but they assert that such demand would be futile for numerous reasons. First, they argue that Goldman's board of directors is interested or lacks independence because of financial ties between the Director Defendants and Goldman.^[68] Next, they allege that there is a reasonable doubt as to whether the board's compensation structure was the product of a valid exercise of business judgment.^[69] The Plaintiffs further assert that there is a substantial likelihood that the Director Defendants will face personal liability for the dereliction of their duty to oversee Goldman's operations.^[70]

I evaluate the Plaintiffs' claims involving active decisions by the board under Aronson. I evaluate the Plaintiffs' oversight claims against the Director Defendants for the failure to monitor Goldman's operations under Rales.

III. ANALYSIS

A. Approval of the Compensation Scheme

The Plaintiffs challenge the Goldman board's approval of the company's compensation scheme on three grounds. They allege (1) that the majority of the board was interested or lacked independence when it approved the compensation scheme, (2) the board did not otherwise validly exercise its business judgment, and (3) the board's approval of the compensation scheme constituted waste. Because the approval of the compensation scheme was a conscious decision by the board, the Plaintiffs must satisfy the Aronson test to successfully plead demand futility. I find that under all three of their challenges to the board's approval of the compensation scheme, the Plaintiffs have failed to adequately plead demand futility.

1. Independence and Disinterestedness of the Board

A plaintiff successfully pleads demand futility under the first prong of Aronson when he alleges particularized facts that create a reasonable doubt that "a `majority' of the directors could [have] impartially consider[ed] a demand" either because they were interested or lacked independence, as of the time that suit was filed.^[71] Generally, "[a] director's interest may be shown by demonstrating a potential personal benefit or detriment to the director as a result of the decision."^[72] A director is independent if the "director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences."^[73]

When the complaint was originally filed, Goldman's board had 12 directors: Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal, Schiro, and Simmons.^[74] The Plaintiffs fail to allege that George and Schiro were interested or lacked independence. It can be assumed that Blankfein and Cohn, as officials of Goldman, would be found to be interested or lack independence. Therefore, the Plaintiffs must satisfy Aronson with respect to at least four of the remaining eight directors.^[75]

The Plaintiffs argue that demand is excused because a majority of the Director Defendants lacked independence or were interested as a result of significant financial relationships with Goldman. The Plaintiffs contend that directors Bryan, Friedman, Gupta, Johnson, Juliber, and Simmons were interested because the private Goldman Sachs Foundation ("the Goldman Foundation") has made contributions to charitable organizations that the directors were affiliated with.^[76] The Plaintiffs assert that directors Dahlback, Friedman, and Mittal were interested because of financial interactions with Goldman.

Below I provide the specific allegations found in the complaint about the Director Defendants. Since the Plaintiffs do not allege that the Director Defendants (aside from Blankfein and Cohn) were interested in the compensation decisions, I analyze whether the director lacks independence.

a. Directors and Charitable Contributions.

i. John H. Bryan

Bryan has served as a Goldman director since 1999.^[77] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.^[78] His charitable works included chairing a successful campaign to raise $100 million for the renovation of the Chicago Lyric Opera House and Orchestra Hall, and acting as a life trustee of the University of Chicago.^[79] The Plaintiffs state that part of Bryan's responsibility, as a trustee, was to raise money for the University. The Plaintiffs note that Goldman has made "substantial contributions"^[80] to the campaign to renovate the Chicago Lyric Opera House and Orchestra Hall and that the Goldman Foundation donated $200,000 to the University in 2006 and allocated an additional $200,000 in 2007.^[81]

The Plaintiffs allege that because Goldman and the Goldman Foundation have assisted Bryan in his fund raising responsibilities, Bryan lacks independence.^[82]

This Court has previously addressed directorial independence and charitable contributions. Hallmark^[83] involved a special committee member who served on a variety of charitable boards where the charity received donations from the defendant corporation. The Hallmark Court noted that, even though part of the member's role was to act as a fund raiser, the member did not receive a salary for his work and did not actively solicit donations from the defendant corporation; therefore, the plaintiff failed to sufficiently show that the member was incapable of "exercising independent judgment."^[84]

This Court also addressed charitable contributions in J.P. Morgan.^[85] In that case, the plaintiff challenged the independence of a director who was the President and a trustee of the American Natural History Museum, another director who was a trustee of the American Natural History Museum, and a director who was the President and CEO of the United Negro College Fund.^[86] The plaintiff alleged that because the defendant corporation made donations to these organizations and was a significant benefactor, the directors lacked independence.^[87] The Court decided that without additional facts showing, for instance, how the donations would affect the decision making of the directors or what percentage of the overall contribution was represented by the corporation's donations, the plaintiff had failed to demonstrate that the directors were not independent.^[88]

In the case at bar, nothing more can be inferred from the complaint than the facts that the Goldman Foundation made donations to a charity that Bryan served as trustee, that part of Bryan's role as a trustee was to raise money, and that Goldman made donations to another charity where Bryan chaired a renovation campaign. The Plaintiffs do not allege that Bryan received a salary for either of his philanthropic roles, that the donations made by the Goldman Foundation or Goldman were the result of active solicitation by Bryan, or that Bryan had other substantial dealings with Goldman or the Goldman Foundation. The Plaintiffs do not provide the ratios of the amounts donated by Goldman, or the Goldman Foundation, to overall donations, or any other information demonstrating that the amount would be material to the charity. Crucially, the Plaintiffs fail to provide any information on how the amounts given influenced Bryan's decision-making process.^[89] Because the complaint lacks such particularized details, the Plaintiffs have failed to create a reasonable doubt as to Bryan's independence.

ii. Rajat K. Gupta

Gupta has served as a Goldman director since 2006.^[90] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.^[91] Gupta is chairman of the board of the Indian School of Business, to which the Goldman Foundation has donated $1.6 million since 2002.^[92] Gupta is also a member of the dean's advisory board of Tsinghua University School of Economics and Management, to which the Foundation has donated at least $3.5 million since 2002.^[93] Finally, Gupta is a member of the United Nations Commission on the Private Sector and Development and he is a special advisor to the UN Secretary General on UN Reform.^[94] Since 2002, the Foundation has donated around $1.6 million to the Model UN program.^[95] The Plaintiffs allege that as "a member of these boards and commission, it is part of Gupta's job to raise money."^[96]

The Plaintiffs challenge to Gupta's independence fails for reasons similar to Bryan's. The Plaintiffs allegations only provide information that shows that Gupta was engaged in philanthropic activities and that the Goldman foundation made donations to charities to which Gupta had ties. The Plaintiffs do not mention the materiality of the donations to the charities or any solicitation on the part of Gupta. The Plaintiffs do not state how Gupta's decision-making was altered by the donations. Without such particularized allegations, the Plaintiffs fail to raise a reasonable doubt that Gupta was independent.

iii. James A. Johnson

Johnson has served as a Goldman director since 1999.^[97] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.^[98] Johnson is an honorary trustee of the Brookings Institution.^[99] The Plaintiffs allege that part of Johnson's role as a trustee is to raise money and that the Foundation donated $100,000 to the Brookings Institution in 2006.^[100]

Again the Plaintiffs fail to provide any information other than that a director was affiliated with a charity and the Goldman Foundation made a donation to that charity. Without more, the Plaintiffs fail to provide particularized factual allegations that create a reasonable doubt in regards to Johnson's independence.

iv. Lois D. Juliber

Juliber has served as a Goldman director since 2004.^[101] She was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.^[102] Juliber is a member of the board of Girls Incorporated, a charitable organization, to which the Plaintiffs contend that the Goldman Foundation donated $400,000 during 2006 and 2007.^[103] The Plaintiffs allege that part of Juliber's job as a Girls Incorporated board member is to raise money.^[104]

For the same reasons that the Plaintiffs' allegations fall short for directors Bryan, Gupta, and Johnson, the Plaintiffs' allegations fall short here. The Plaintiffs do not plead facts sufficient to create a reasonable doubt whether Juliber was independent.

v. Ruth J. Simmons

Simmons has served as a Goldman director since 2000.^[105] She was also a member of Goldman's Compensation Committee.^[106] Simmons is President of Brown University, and the Plaintiffs allege that part of her job is to raise money for the University.^[107] The Plaintiffs note that "[t]he [Goldman] Foundation has pledged funding in an undisclosed amount to share in the support of a position of Program Director at The Swearer Center for Public Service at Brown University," and so far $200,000 has been allocated to this project.^[108]

Simmons differs from the other directors in that, rather than sitting on a charitable board, as the other defendants do, Simmons livelihood as President of Brown University does directly depend on her fundraising abilities;^[109] however, the Plaintiffs fail to allege particularized factual allegations that create a reasonable doubt that Simmons was independent.

The Plaintiffs provide the amount donated to Brown University, but do not give any additional information showing the materiality of the donation to Brown University. The Plaintiffs do not provide the percentage this amount represented of the total amount raised by Brown, or even how this amount was material to the Swearer Center. Additionally, the Plaintiffs' allegations do not provide information that Simmons actively solicited this amount or how this or potential future donations would affect Simmons. The facts pled are insufficient to raise the inference that Simmons feels obligated to the foundation or Goldman management. Consequently, the factual allegations pled by the Plaintiffs fail to raise a reasonable doubt that, despite Simmons's position as President of Brown University, she remained independent.

b. Directors with Other Alleged Interests.

The Plaintiffs allege that three directors have, in addition (in the case of Mr. Friedman) to charitable connections to Goldman or the Goldman Foundation, business dealings with Goldman that render them dependent for purposes of the first prong of the Aronson analysis. Having already found that a majority of the Goldman board was independent, I could simply omit analysis of the independence of these directors under Aronson. I will briefly address the Plaintiffs contentions with respect to the directors below.

i. Stephen Friedman

Friedman has served as a Goldman director since 2005.^[110] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.^[111] The Plaintiffs allege that Friedman lacks independence for two reasons. First, the Plaintiffs allege that Friedman is not independent because of his philanthropic work and Goldman's advancement thereof. Second, the Plaintiffs allege that Friedman is not independent due to his business dealings with Goldman.

Friedman is an emeritus trustee of Columbia University.^[112] The Plaintiffs contend that part of his job as a trustee is to raise money for Columbia University and that since 2002 the Goldman foundation has donated at least $765,000 to Columbia University.^[113]

Taken by themselves, the facts pled, concerning Friedman's charitable connection to the Goldman Foundation, are insufficient to create a reasonable doubt that Friedman was independent. Similar to the Plaintiffs' other allegations concerning defendants with charitable connections to the Goldman Foundation, the Plaintiffs only allege that Friedman is a trustee of Columbia University, that part of his job as a trustee is to raise money, and that the Foundation has donated money to the University. The complaint fails to allege that Friedman solicited money from the Goldman Foundation, that he receives any salary for his work as trustee, or that he had any substantial dealings with the Goldman Foundation.

Besides their allegations concerning Friedman's charitable endeavors, the Plaintiffs also allege that Goldman "has invested at least $670 million in funds managed by Friedman."^[114] This is the entirety of the pleadings regarding Friedman's business involvement with Goldman. Contrary to the contentions in the Plaintiffs' Answering Brief, the complaint does not allege that Friedman relies on the management of these funds for his livelihood; that contention, if buttressed by factual allegations in the complaint, might reasonably demonstrate lack of independence. The complaint is insufficient, as written, for that purpose.

ii. Claes Dahlback

Dahlback has served as a Goldman director since 2003.^[115] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.^[116] Besides serving on Goldman's board, Dahlback is a senior advisor to an entity described in the complaint as "Investor AB."^[117] The Plaintiffs note that Goldman has invested more than $600 million in funds to which Dahlback is an adviser (presumably, but not explicitly, Investor AB).^[118] The Plaintiffs contend that because Dahlback had substantial financial relationships with Goldman, he lacked independence.

The Plaintiffs' allegations regarding Dahlback are sparse and tenuous. "[T]he complaint contains no allegations of fact tending to show that [any] fees paid were material to [Dahlback]."^[119] The Plaintiffs only note that Dahlback is an advisor to Investor AB, and that Goldman has invested more than $600 million in funds with an entity to which Dahlback is an advisor. Contrary to the statements by the Plaintiffs in the answering brief, the complaint does not allege that Dahlback's "livelihood depends on his full-time job as an advisor." The Plaintiffs fail to allege that Dahlback derives a substantial benefit from being an advisor to Investor AB, that Dahlback solicited funds from Goldman, that Investor AB received funds because of Dahlback's involvement, or any other fact that would tend to raise a reasonable doubt that Dahlback's future employment with Investor AB is independent of Goldman's investment. As with defendant Friedman, the pleadings are insufficient to raise a reasonable doubt as to Dahlback's independence.

iii. Lakshmi N. Mittal

Mittal has served as a Goldman director since 2008.^[120] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.^[121] Mittal is the chairman and CEO of ArcelorMittal.^[122] The Plaintiffs allege that "Goldman has arranged or provided billions of euros in financing to his company" and that "[d]uring 2007 and 2008 alone, the Company had made loans to AcelorMittal [sic] in the aggregate amount of 464 million euros."^[123]

Goldman is an investment bank. The fact "[t]hat it provided financing to large . . . companies should come as no shock to anyone. Yet this is all that the plaintiffs allege."^[124] The Plaintiffs fail to plead facts that show anything other than a series of market transactions occurred between ArcelorMittal and Goldman. For instance, the Plaintiffs have not alleged that ArcelorMittal is receiving a discounted interest rate on the loans from Goldman, that Mittal was unable to receive financing from any other lender, or that loans from Goldman compose a substantial part of ArcelorMittal's funding.^[125] The pleadings fail to raise a reasonable doubt as to the independence of Mittal.

B. Otherwise the Product of a Valid Exercise of Business Judgment

Having determined that the Plaintiffs have not pled particularized factual allegations that raise a reasonable doubt as to a majority of the Director Defendants' disinterestedness and independence, I must now apply the second prong of Aronson and determine whether the Plaintiffs have pled particularized facts that raise a reasonable doubt that Goldman's compensation scheme was otherwise the product of a valid exercise of business judgment.^[126] To successfully plead demand futility under the second prong of Aronson, the Plaintiffs must allege "particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision."^[127] Goldman's charter has an 8 Del. C. § 102(b)(7) provision, providing that the directors are exculpated from liability except for claims based on `bad faith' conduct; therefore, the Plaintiffs must also plead particularized facts that demonstrate that the directors acted with scienter; i.e., there was an "intentional dereliction of duty" or "a conscious disregard" for their responsibilities, amounting to bad faith.^[128]

The Plaintiffs assert that the Director Defendants owed "a fiduciary duty to assess continually Goldman's compensation scheme to ensure that it reasonably compensated employees and reasonably allocated the profit of Goldman's activities according to the contributions of shareholder capital and the employees of the Company."^[129] The Plaintiffs contend that the entire compensation structure put in place by the Director Defendants was done in bad faith and that the Director Defendants were not properly informed when making compensation awards.^[130] I find that the Plaintiffs have not provided particularized factual allegations that raise a reasonable doubt whether the process by which Goldman's compensation scheme allocated profits between the employees and shareholders was implemented in good faith and on an informed basis.

1. Good Faith

"[A] failure to act in good faith requires conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence)."^[131] Examples of this include situations where the fiduciary intentionally breaks the law, "where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation," or "where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties."^[132] While this is not an exclusive list, "these three are the most salient."^[133]

The third category above falls between "conduct motivated by subjective bad intent," and "conduct resulting from gross negligence."^[134] "Conscious disregard" involves an "intentional dereliction of duty" which is "more culpable than simple inattention or failure to be informed of all facts material to the decision."^[135]

The Plaintiffs' main contention is that Goldman's compensation scheme itself was approved in bad faith. The Plaintiffs allege that "[n]o person acting in good faith on behalf of Goldman consistently could approve the payment of between 44% and 48% of net revenues to Goldman's employees year in and year out"^[136] and that accordingly the Director Defendants abdicated their duties by engaging in these "practices that overcompensate management."^[137] The complaint is entirely silent with respect to any individual salary or bonus; the Plaintiffs' allegation is that the scheme so misaligns incentives that it cannot have been the product of a good faith board decision.

The Plaintiffs' problems with the compensation plan structure can be summarized as follows: Goldman's compensation plan is a positive feedback loop where employees reap the benefits but the stockholders bear the losses. Goldman's plan incentivizes employees to leverage Goldman's assets and engage in risky behavior in order to maximize yearly net revenue and their yearly bonuses. At the end of the year, the remaining revenue that is not paid as compensation, with the exception of small dividend payments to stockholders, is funneled back into the company. This increases the quantity of assets Goldman employees have available to leverage and invest. Goldman employees then start the process over with a greater asset base, increase net revenue again, receive even larger paychecks the next year, and the cycle continues. At the same time, stockholders are only receiving a small percentage of net revenue as dividends; therefore, the majority of the stockholders' assets are simply being cycled back into Goldman for the Goldman employees to use.

The stockholders' and Goldman employees' interests diverge most notably, argue the Plaintiffs, when there is a drop in revenue. If net revenues fall, the stockholders lose their equity, but the Goldman employees do not share this loss.^[138]

The decision as to how much compensation is appropriate to retain and incentivize employees, both individually and in the aggregate, is a core function of a board of directors exercising its business judgment. The Plaintiffs' pleadings fall short of creating a reasonable doubt that the Directors Defendants have failed to exercise that judgment here. The Plaintiffs acknowledge that the compensation plan authorized by Goldman's board, which links compensation to revenue produced, was intended to align employee interests with those of the stockholders and incentivize the production of wealth. To an extent, it does so: extra effort by employees to raise corporate revenue, if successful, is rewarded. The Plaintiffs' allegations mainly propose that the compensation scheme implemented by the board does not perfectly align these interests; and that, in fact, it may encourage employee behavior incongruent with the stockholders' interest. This may be correct, but it is irrelevant. The fact that the Plaintiffs may desire a different compensation scheme does not indicate that equitable relief is warranted. Such changes may be accomplished through directorial elections, but not, absent a showing unmet here, through this Court.

Allocating compensation as a percentage of net revenues does not make it virtually inevitable that management will work against the interests of the stockholders. Here, management was only taking a percentage of the net revenues. The remainder of the net revenues was funneled back into the company in order to create future revenues; therefore, management and stockholder interests were aligned. Management would increase its compensation by increasing revenues, and stockholders would own a part of a company which has more assets available to create future wealth.

The Plaintiffs' focus on percentages ignores the reality that over the past 10 years, in absolute terms, Goldman's net revenue and dividends have substantially increased.^[139] Management's compensation is based on net revenues. Management's ability to generate that revenue is a function of the total asset base, which means management has an interest in maintaining that base (owned, of course, by the Plaintiffs and fellow shareholders) in order to create future revenues upon which its future earnings rely.

The Plaintiffs argue that there was an intentional dereliction of duty or a conscious disregard by the Director Defendants in setting compensation levels; however, the Plaintiffs fail to plead with particularity that any of the Director Defendants had the scienter necessary to give rise to a violation of the duty of loyalty.^[140] The Plaintiffs do not allege that the board failed to employ a metric to set compensation levels; rather, they merely argue that a different metric, such as comparing Goldman's compensation to that of hedge fund managers rather than to compensation at other investment banks, would have yielded a better result.^[141] But this observance does not make the board's decision self-evidently wrong, and it does not raise a reasonable doubt that the board approved Goldman's compensation structure in good faith.

2. Adequately Informed

The Plaintiffs also contend that the board was uninformed in making its compensation decision. "Pre-suit demand will be excused in a derivative suit only if the . . . particularized facts in the complaint create a reasonable doubt that the informational component of the directors' decisionmaking process, measured by concepts of gross negligence, included consideration of all material information reasonably available."^[142] Here, Goldman's charter has a 8 Del. C. § 102(b)(7) provision, so gross negligence, by itself, is insufficient basis upon which to impose liability. The Plaintiffs must allege particularized facts creating a reasonable doubt that the directors acted in good faith.

The Plaintiffs allege that the Director Defendants fell short of this reasonableness standard in several ways. They point out that the Director Defendants never "analyzed or assessed the extent to which management performance, as opposed to the ever-growing shareholder equity and assets available for investment, has contributed to the generation of net revenues."^[143] The Plaintiffs also argue that because the amount of stockholder equity and assets available for investment was responsible for the total revenue generated, the Director Defendants should have used other metrics, such as compensation levels at shareholder funds and hedge funds, to decide compensation levels at Goldman.^[144] The Plaintiffs allege that Goldman's performance, on a risk adjusted basis, lagged behind hedge fund competitors, yet the percentage of net revenue awarded did not substantially vary, and that the Director Defendants never adequately adjusted compensation in anticipation of resolving future claims.^[145]

Nonetheless, the Plaintiffs acknowledge that Goldman has a compensation committee that reviews and approves the annual compensation of Goldman's executives.^[146] The Plaintiffs also acknowledge that Goldman has adopted a "pay for performance" philosophy, that Goldman represents as a way to align employee and shareholder interests.^[147] The Plaintiffs further acknowledge that Goldman's compensation committee receives information from Goldman's management concerning Goldman's net revenues and the ratio of compensation and benefits expenses to net revenues.^[148] Finally, the Plaintiffs note that the compensation committee reviewed information relating to the compensation ratio of Goldman's "core competitors that are investment banks (Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley)."^[149]

Rather than suggesting that the Director Defendants acted on an uninformed basis, the Plaintiffs' pleadings indicate that the board adequately informed itself before making a decision on compensation. The Director Defendants considered other investment bank comparables, varied the total percent and the total dollar amount awarded as compensation, and changed the total amount of compensation in response to changing public opinion.^[150] None of the Plaintiffs' allegations suggests gross negligence on the part of the Director Defendants, and the conduct described in the Plaintiffs' allegations certainly does not rise to the level of bad faith such that the Director Defendants would lose the protection of an 8 Del. C. § 102(b)(7) exculpatory provision.

At most, the Plaintiffs' allegations suggest that there were other metrics not considered by the board that might have produced better results. The business judgment rule, however, only requires the board to reasonably inform itself; it does not require perfection or the consideration of every conceivable alternative.^[151] The factual allegations pled by the Plaintiffs, therefore, do not raise a reasonable doubt that the board was informed when it approved Goldman's compensation scheme.

3. Waste

The Plaintiffs also contend that Goldman's compensation levels were unconscionable and constituted waste. To sustain their claim that demand would be futile, the Plaintiffs must raise a reasonable doubt that Goldman's compensation levels were the product of a valid business judgment. Specifically, to excuse demand on a waste claim, the Plaintiffs must plead particularized allegations that "overcome the general presumption of good faith by showing that the board's decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests."^[152]

"[W]aste entails an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade."^[153] Accordingly, if "there is any substantial consideration received by the corporation, and if there is a good faith judgment that in the circumstances the transaction is worthwhile, there should be no finding of waste."^[154] The reason being, "[c]ourts are ill-fitted to attempt to weigh the `adequacy' of consideration under the waste standard or, ex post, to judge appropriate degrees of business risk."^[155] Because of this, "[i]t is the essence of business judgment for a board to determine if a particular individual warrant[s] large amounts of money."^[156]

The Plaintiffs' waste allegations revolve around three premises: that Goldman's pay per employee is significantly higher than its peers, that Goldman's compensation ratios should be compared to hedge funds and other shareholder funds to reflect Goldman's increasing reliance on proprietary trading as opposed to traditional investment banking services, and that Goldman's earnings and related compensation are only the result of risk taking.

The Plaintiffs consciously do not identify a particular individual or person who received excessive compensation, but instead focus on the average compensation received by each of Goldman's 31,000 employees.^[157] The Plaintiffs allege that "Goldman consistently allocated and distributed anywhere from two to six times the amounts that its peers distributed to each employee,"^[158] and the Plaintiffs provide comparisons of Goldman's average pay per employee to firms such as Morgan Stanley, Bear Stearns, Merrill Lynch, Citigroup, and Bank of America.^[159] The Plaintiffs note that these firms are investment banks, but do not provide any indication of why these firms are comparable to Goldman or their respective primary areas of business. The Plaintiffs do not compare trading segment to trading segment or any other similar metric. A broad assertion that Goldman's board devoted more resources to compensation than did other firms, standing alone, is not a particularized factual allegation creating a reasonable doubt that Goldman's compensation levels were the product of a valid business judgment.

The Plaintiffs urge that, in light of Goldman's increasing reliance on proprietary trading, Goldman's employees' compensation should be compared against a hedge fund or other shareholder fund.^[160] The Plaintiffs allege that Goldman's compensation scheme is equal to 2% of net assets and 45% of the net income produced, but a typical hedge fund is only awarded 2% of net assets and 20% of the net income produced.^[161] The Plaintiffs paradoxically assert that "no hedge fund manager may command compensation for managing assets at the annual rate of 2% of net assets and 45% of net revenues," but then immediately acknowledge that in fact there are hedge funds that have such compensation schemes.^[162] It is apparent to me from the allegations of the complaint that while the majority of hedge funds may use a "2 and 20" compensation scheme, this is not the exclusive method used too set such compensation. Even if I were to conclude that a hedge fund or shareholder fund would be an appropriate yardstick with which to measure Goldman's compensation package and "even though the amounts paid to defendants exceeded the industry average," I fail to see a "shocking disparity" between the percentages that would render them "legally excessive."^[163]

In the end, while the Goldman employees may not have been doing, in the words of the complaint and Defendant Blankfein, "God's Work,"^[164] the complaint fails to present facts that demonstrate that the work done by Goldman's 31,000 employees was of such limited value to the corporation that no reasonable person in the directors' position would have approved their levels of compensation.^[165] Absent such facts, these decisions are the province of the board of directors rather than the courts.^[166] Without examining the payment to a specific individual, or group of individuals, and what was specifically done in exchange for that payment, I am unable to determine whether a transaction is "so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration."^[167]

The closest the Plaintiffs come to pleading waste with any factual particularity is in regards to the payment to the Trading and Principal Investment segment in 2008. The Plaintiffs allege that in 2008 "the Trading and Principal Investments segment produced $9.06 billion in net revenue, but, as a result of discretionary bonuses paid to employees, lost more than $2.7 billion for the [stockholders]."^[168] The Plaintiffs' allegations, however, are insufficient to raise a reasonable doubt that Goldman's compensation levels in this segment were the product of a valid business judgment. As a strictly pedagogic exercise, imagine a situation where one half of the traders lost money, and the other half made the same amount of money, so that the firm broke even. Even if no bonus was awarded to the half that lost money, a rational manager would still want to award a bonus to the half that did make money in order to keep that talent from leaving. Since net trading gains were $0, these bonuses would cause a net loss, but there would not be a waste of corporate assets because there was adequate consideration for the bonuses. Without specific allegations of unconscionable transactions and details regarding who was paid and for what reasons they were paid, the Plaintiffs fail to adequately plead demand futility on the basis of waste.

Finally, the Plaintiffs herald the fact that during the sub-prime crisis the Director Defendants continued to allocate similar percentages of net revenue as compensation while the firm was engaged in risky transactions; however, "there should be no finding of waste, even if the fact finder would conclude ex post that the transaction was unreasonably risky. Any other rule would deter corporate boards from the optimal rational acceptance of risk."^[169] Because this complaint lacks a particular pleading that an individual or group of individuals was engaged in transactions so unconscionable that no rational director could have compensated them, the Plaintiffs have failed to raise a reasonable doubt that the compensation decisions were not the product of a valid business judgment.

D. The Plaintiffs' Caremark Claim

In addition to the claims addressed above, the Plaintiffs assert that the board breached its duty to monitor the company as required under Caremark.^[170] Because this claim attacks a failure to act, rather than a specific transaction, the Rales standard applies.^[171] The Rales standard addresses whether the "board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations."^[172] To properly plead demand futility under Rales, a plaintiff must allege particularized facts which create a reasonable doubt that "the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand."^[173]

"Under Rales, defendant directors who face a substantial likelihood of personal liability are deemed interested in the transaction and thus cannot make an impartial decision."^[174] A simple allegation of potential directorial liability is insufficient to excuse demand, else the demand requirement itself would be rendered toothless, and directorial control over corporate litigation would be lost. The likelihood of directors' liability is significantly lessened where, as here, the corporate charter exculpates the directors from liability to the extent authorized by 8 Del. C. § 102(b)(7).^[175] Because Goldman's charter contains such a provision, shielding directors from liability for breaches of the duty of care (absent bad faith) "a serious threat of liability may only be found to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized facts."^[176] This means that "plaintiffs must plead particularized facts showing bad faith in order to establish a substantial likelihood of personal directorial liability."^[177]

The Plaintiffs' contentions that the Director Defendants face a substantial likelihood of personal liability are based on oversight liability, as articulated by then-Chancellor Allen in Caremark. In Caremark, Chancellor Allen held that a company's board of directors could not "satisfy [its] obligation to be reasonably informed . . . without assuring [itself] that information and reporting systems exist[ed] in the organization."^[178] These systems are needed to provide the board with accurate information so that the board may reach "informed judgments concerning both the corporation's compliance with law and its business performance."^[179] A breach of oversight responsabilities is a breach of the duty of loyalty, and thus not exculpated under section 102(b)(7).

To face a substantial likelihood of oversight liability for a Caremark claim, the Director Defendants must have "(a) . . . utterly failed to implement any reporting or information system or controls" (which the Plaintiffs concede is not the case here); "or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention."^[180] Furthermore, "where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation . . . 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."^[181]

The Plaintiffs specifically contend that the Director Defendants created a compensation structure that caused management's interests to diverge from the stockholders' interests. As a result, management took risks which eventually led to unethical behavior and illegal conduct that exposed Goldman to financial liability. According to the Plaintiffs, after the Director Defendants created Goldman's compensation structure, they had a duty to ensure protection from abuses by management, which were allegedly made more likely due to the form of that structure. Instead of overseeing management, however, the Director Defendants abdicated their oversight responsibilities.^[182]

Unlike the original and most subsequent Caremark claims, where plaintiffs alleged that liability was predicated on a failure to oversee corporate conduct leading to violations of law,^[183] the Plaintiffs here argue that the Director Defendants are also liable for oversight failure relating to Goldman's business performance.^[184] Because the oversight of legal compliance and the oversight of business risk raise distinct concerns, I shall examine those issues separately.

1. Unlawful Conduct

As described above, the Plaintiffs must plead particularized facts suggesting that the board failed to implement a monitoring and reporting system or consciously disregarded the information provided by that system.^[185] Here, the Plaintiffs assert that the Goldman employees engaged in unethical trading practices in search of short term revenues.^[186] Although the Plaintiffs' allegations fall short of the florid contentions about the corporation made elsewhere,^[187] the Plaintiffs provide examples, based on the Permanent Subcommittee report, of conduct they believe was unethical and harmful to the company.^[188] The Plaintiffs argue that the Director Defendants should have been aware of purportedly unethical conduct such as securitizing high risk mortgages, shorting the mortgage market, using naked credit default swaps, and "magnifying risk" through the creation of synthetic CDOs.^[189] The Plaintiffs also allege that Goldman's trading business often put Goldman in potential conflicts of interest with its own clients and that the Director Defendants were aware of this and have embraced this goal.

Illegal corporate conduct is not loyal corporate conduct. "[A] fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profit by violating the law."^[190] The "unethical" conduct the Plaintiffs allege here, however, is not the type of wrongdoing envisioned by Caremark. The conduct at issue here involves, for the most part, legal business decisions that were firmly within management's judgment to pursue. There is nothing intrinsic in using naked credit default swaps or shorting the mortgage market that makes these actions illegal or wrongful. These are actions that Goldman managers, presumably using their informed business judgment, made to hedge the Corporation's assets against risk or to earn a higher return. Legal, if risky, actions that are within management's discretion to pursue are not "red flags" that would put a board on notice of unlawful conduct.

Similarly, securitizing and selling high risk mortgages is not illegal or wrongful per se. The Plaintiffs take issue with actions where Goldman continued to sell mortgage related products to its clients while profiting from the decline of the mortgage market. In particular, the Plaintiffs point to three transactions where Goldman took the short side of synthetic CDOs while simultaneously being long on the underlying reference assets, or sold a long position while being, itself, short.

The three transactions referenced by the Plaintiffs as "disloyal and unethical trading practices" are not sufficient pleadings of wrongdoing or illegality necessary to establish a Caremark claim—the only inferences that can be made are that Goldman had risky assets and that Goldman made a business decision, involving risk, to sell or hedge these assets. The Hudson Mezzanine 2006-1 and Anderson Mezzanine Funding 2007-1 were synthetic CDOs that referenced RMBS securities.^[191] Timberwolf I was a "hybrid cash/synthetic CDO squared" where "a significant portion of the referenced assets were CDO securities."^[192] Goldman structured all three securities and took short positions because it was trying to reduce its mortgage holdings.^[193] All three securities eventually were downgraded, and the investors who had taken long positions lost money.^[194] The fact that another party would make money from such a decline was obvious to those investors—inherent in the structure of a synthetic CDO is that another party is taking a short position. The Plaintiffs' allegations can be boiled down to the fact that these three securities lost money when Goldman may have had a conflict of interest. Though these transactions involved risk, including a risk of damaging the company's reputation, these are not "red flags" that would give rise to an actionable Caremark claim—reputational risk exists in any business decision.

To act in bad faith, there must be scienter on the part of the defendant director.^[195] The Plaintiffs argue that, as Goldman increased its proprietary trading, the Director Defendants were aware of the possible conflicts of interest and that the conflicts had to be addressed.^[196] The three transactions referenced by the Plaintiffs do not indicate that the Director Defendants "acted inconsistent[ly] with [their] fiduciary duties [or], most importantly, that the director[s] knew [they were] so acting."^[197] A conflict of interest may involve wrongdoing, but is not wrongdoing itself. An active management of conflicts of interest is not an abdication of oversight duties, and an inference cannot be made that the Director Defendants were acting in bad faith.

The Plaintiffs also posit the theory that the credit rating agencies were beholden to Goldman and that Goldman unduly influenced them to give higher credit ratings to certain products. These allegations are purely conclusory. The complaint is silent as to any mechanism (other than that inherent in the relationship of a credit agency to a large financial player) by which Goldman coerced or colluded with the ratings agencies or (more to the point in a Caremark context) that the Director Defendants disregarded any such actions in bad faith.

The heart of the Plaintiffs' Caremark claim is in the allegation that Goldman's "trading practices have subjected the Firm to civil liability, via, inter alia, an SEC investigation and lawsuit."^[198] Once the legal, permissible business decisions are removed, what the Plaintiffs are left with is a single transaction that Goldman settled with the SEC.

In 2007 Goldman designed a CDO, Abacus 2007-AC1, with input from the hedge fund founder John Paulson.^[199] The Plaintiffs allege that Paulson helped select a set of mortgages that would collateralize the CDO and then took a short position, betting that the same mortgages would fall in value.^[200] The Plaintiffs point out that meanwhile Goldman was selling long positions in the CDO without disclosing Paulson's role in selecting the underlying collateral or Paulson's short position.^[201] The Plaintiffs allege that "Goldman's clients who took long positions in Abacus 2007-AC1 lost their entire $1 billion investment."^[202] As a result, on April 16, 2010 the SEC charged Goldman and a Goldman Vice President with fraud for their roles in creating and marketing Abacus 2007-AC1.^[203] On July 14, 2010, Goldman settled the case with the SEC.^[204] As part of the settlement, Goldman agreed to disgorge its profits on the Abacus transaction, pay a large civil penalty, and evaluate various compliance programs.^[205]

The Abacus transaction, with its disclosure problems, is unique. The complaint does not plead with factual particularity that the other highlighted transactions contain disclosure omissions similar to Abacus, and the Abacus transaction on its own cannot demonstrate the willful ignorance of "red flags" on the part of the Defendants that might lead to a reasonable apprehension of liability.^[206] Though the Plaintiffs allege that the "Abacus deals are likely just the tip of the iceberg," conclusory statements are not particularized pleadings.^[207] The single Abacus transaction without more is insufficient to provide a reasonable inference of bad faith on the part of the Director Defendants.

2. Business Risk

Part of the Plaintiffs' Caremark claim stems from the Director Defendants' oversight of Goldman's business practices. As a preliminary matter, this Court has not definitively stated whether a board's Caremark duties include a duty to monitor business risk. In Citigroup, then-Chancellor Chandler posited that "it may be possible for a plaintiff to meet the burden under some set of facts."^[208] Indeed, the Caremark court seemed to suggest the possibility of such a claim:

[I]t would . . . be a mistake to conclude that . . . corporate boards may satisfy their obligation to be reasonably informed concerning the corporation without assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation's compliance with law and its business performance.^[209]

As was the case in Citigroup, however, the facts pled here do not give rise to a claim under Caremark, and thus I do not need to reach the issue of whether the duty of oversight includes the duty to monitor business risk.

As the Court observed in Citigroup, "imposing Caremark-type duties on directors to monitor business risk is fundamentally different" from imposing on directors a duty to monitor fraud and illegal activity.^[210] Risk is "the chance that a return on an investment will be different than expected."^[211] Consistent with this, "a company or investor that is willing to take on more risk can earn a higher return."^[212] The manner in which a company "evaluate[s] the trade-off between risk and return" is "[t]he essence of . . . business judgment."^[213] The Plaintiffs here allege that Goldman was over-leveraged, engaged in risky business practices, and did not set enough money aside for future losses.^[214] As a result, the Plaintiffs assert, Goldman was undercapitalized, forcing it to become a bank holding company and to take on an onerous loan from Warren Buffet.^[215]

Although the Plaintiffs have molded their claims with an eye to the language of Caremark, the essence of their complaint is that I should hold the Director Defendants "personally liable for making (or allowing to be made) business decisions that, in hindsight, turned out poorly for the Company."^[216] If an actionable duty to monitor business risk exists, it cannot encompass any substantive evaluation by a court of a board's determination of the appropriate amount of risk. Such decisions plainly involve business judgment.^[217]

The Plaintiffs' remaining allegations in essence seek to hold the Director Defendants "personally liable to the Company because they failed to fully recognize the risk posed by subprime securities."^[218] The Plaintiffs charge that the entire board was aware of, or should have been aware of, "the details of the trading business of Goldman and failed to take appropriate action."^[219] The Plaintiffs note that "[a]s the housing market began to fracture in early 2007, a committee of senior Goldman executives . . . including Defendants Viniar, Cohn, and Blankfein and those helping to manage Goldman's mortgage, credit and legal operations, took an active role in overseeing the mortgage unit."^[220] "[This] committee's job was to vet potential new products and transactions, being wary of deals that exposed Goldman to too much risk."^[221] This committee eventually decided that housing prices would decline and decided to take a short position in the mortgage market.^[222] The Plaintiffs contend that the Director Defendants were "fully aware of the extent of Goldman's RMBS and CDO securities market activities."^[223] The Plaintiffs point out that the Director Defendants were informed about the business decisions Goldman made during the year including an "intensive effort to not only reduce its mortgage risk exposure, but profit from high risk RMBS and CDO Securities incurring losses."^[224] The Plaintiffs further allege that because of this the Director Defendants "understood that these efforts involved very large amounts of Goldman's capital that exceeded the Company's Value-at-Risk measures."^[225] Finally, the Plaintiffs allege that the practices allowed by the board, including transactions in which Goldman's risk was hedged, imposed reputational risk upon the corporation.^[226]

Thus, the Plaintiffs do not plead with particularity anything that suggests that the Director Defendants acted in bad faith or otherwise consciously disregarded their oversight responsibilities in regards to Goldman's business risk. Goldman had an Audit Committee in place that was "charged with assisting the Board in its oversight of the Company's management of market, credit liquidity and other financial and operational risks."^[227] The Director Defendants exercised their business judgment in choosing and implementing a risk management system that they presumably believed would keep them reasonably informed of the company's business risks. As described in detail above, the Plaintiffs admit that the Director Defendants were "fully aware of the extent of Goldman's RMBS and CDO securities market activities."^[228]

"Oversight duties under Delaware law are not designed to subject directors, even expert directors, to personal liability for failure to predict the future and to properly evaluate business risk."^[229] No reasonable inference can be made from the pleadings that the Director Defendants consciously disregarded their duty to be informed about business risk (assuming such a duty exists). On the contrary, the pleadings suggest that the Director Defendants kept themselves reasonably informed and fulfilled their duty of oversight in good faith.^[230] Good faith, not a good result, is what is required of the board.

Goldman's board and management made decisions to hedge exposure during the deterioration of the housing market, decisions that have been roundly criticized in Congress and elsewhere. Those decisions involved taking objectively large risks, including particularly reputational risks. The outcome of that risk-taking may prove ultimately costly to the corporation. The Plaintiffs, however, have failed to plead with particularity that the Director Defendants consciously and in bad faith disregarded these risks; to the contrary, the facts pled indicate that the board kept itself informed of the risks involved. The Plaintiffs have failed to plead facts showing a substantial likelihood of liability on the part of the Director Defendants under Caremark.

IV. CONCLUSION

The Delaware General Corporation law affords directors and officers broad discretion to exercise their business judgment in the fulfillment of their obligations to the corporation. Consequently, Delaware's case law imposes fiduciary duties on directors and officers to ensure their loyalty and care toward the corporation. When an individual breaches these duties, it is the proper function of this Court to step in and enforce those fiduciary obligations.

Here, the Plaintiffs allege that the Director Defendants violated fiduciary duties in setting compensation levels and failing to oversee the risks created thereby. The facts pled in support of these allegations, however, if true, support only a conclusion that the directors made poor business decisions. Through the business judgment rule, Delaware law encourages corporate fiduciaries to attempt to increase stockholder wealth by engaging in those risks that, in their business judgment, are in the best interest of the corporation "without the debilitating fear that they will be held personally liable if the company experiences losses."^[231] The Plaintiffs have failed to allege facts sufficient to demonstrate that the directors were unable to properly exercise this judgment in deciding whether to bring these claims. Since the Plaintiffs have failed to make a demand upon the Corporation, this matter must be dismissed; therefore, I need not reach the Defendant's motion to dismiss under Rule 12 (b)(6).

For the foregoing reasons, the Defendants' motion to dismiss is granted, and the Plaintiffs' claims are dismissed with prejudice.

An Order has been entered consistent with this Opinion.

[1] See Section II for a discussion of the applicable standard in a motion to dismiss.

[2] Compl. ¶ 37.

[3] Compl. ¶ 42. "Proprietary Trading" refers to a firm's trades for its own benefit with its own money.

[4] Compl. ¶ 36.

[5] Compl. ¶ 36.

[6] Id.

[7] Compl. ¶ 109.

[8] Id.

[9] Compl. ¶ 49; see also Compl. ¶ 109.

[10] Compl. ¶ 92.

[11] Compl. ¶ 87.

[12] Compl. ¶ 89.

[13] Id.

[14] Id.

[15] Compl. ¶¶ 89-90.

[16] Compl. ¶ 91.

[17] Compl. ¶¶ 90-91. Goldman's total net revenue was $46 billion in 2007, $22.2 billion in 2008, and $45.2 billion in 2009. Compl. ¶ 115. Goldman paid its employees total compensation of $20.2 billion in 2007, $10.9 billion in 2008, and $16.2 billion in 2009. Compl. ¶ 116. As a percentage of total net revenue, the total compensation paid by Goldman was 44% in 2007, 48% in 2008, and 36% in 2009. Compl. ¶ 115. The total compensation initially approved in 2007, by the Compensation Committee, was $16.7 billion or 47% of total revenue; however, this amount was changed after public outcry. Compl. ¶ 113.

[18] Compl. ¶ 115.

[19] Compl. ¶¶ 109-24.

[20] See Compl. ¶¶ 108, 124.

[21] Compl. ¶ 95.

[22] Compl. ¶¶ 37, 44. The segment generated 76% of Goldman's revenues in 2009, and as of December 2009, the segment also utilized 78% of the firm's assets. Compl. ¶ 43.

[23] Compl. ¶¶ 95, 136.

[24] Compl. ¶ 92.

[25] Compl. ¶ 95.

[26] Compl. ¶¶ 132-33.

[27] Compl. ¶ 78.

[28] Id.

[29] Id.

[30] Compl. ¶¶ 51-52.

[31] Compl. ¶ 52.

[32] Compl. ¶ 78.

[33] Compl. ¶ 54.

[34] Compl. ¶ 59.

[35] Id.

[36] Compl. ¶ 60.

[37] Compl. ¶ 61.

[38] Compl. ¶¶ 64, 77, 84.

[39] Compl. ¶ 65. A CDO is a type of asset-backed security backed by a pool of bonds, loans, or other assets. The underlying assets' cash flow is used to make interest and principal payments to the holders of the CDO securities. CDO securities are issued in different classes, or tranches, that vary by their level of risk and maturity date. The senior tranches are paid first, while the junior tranches have higher interest rates or lower prices to compensate for the higher risk of default.

[40] Id.

[41] Id.

[42] Compl. ¶ 72.

[43] Compl. ¶ 73.

[44] Id.

[45] Compl. ¶¶ 75, 147.

[46] Synthetic CDOs are CDOs structured out of credit default swaps. A credit default swap (CDS) can essentially be thought of as an insurance policy on an asset such as a CDO or CDO tranche. The purchaser of the CDS pays a fixed amount at certain intervals to the seller of the CDS. If the CDO maintains its value, the seller of the CDS retains the money paid by the purchaser of the CDS; however, if the CDO falls in value, the seller of the CDS must pay the purchaser of the CDS for losses. Synthetic CDOs package CDSs together and use the cash flows from the CDSs to pay the purchasers of the CDO.

[47] Compl. ¶ 75.

[48] Id.

[49] Compl. ¶ 76.

[50] Compl. ¶¶ 175-77.

[51] Compl. ¶ 186.

[52] Compl. ¶ 142.

[53] Cent. Mortgage Capital Holdings v. Morgan Stanley, 2011 WL 3612992, at *5 (Del. Aug. 18, 2011). That is, the pleading standard at the motion to dismiss stage in Delaware is "conceivability" as opposed to the higher "plausibility" standard that applies to federal civil actions. Id. (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007); Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)). The difference, according to our Supreme Court, is that "[o]ur governing `conceivability' standard is more akin to `possibility,' while the federal `plausibility' standard falls somewhere beyond mere `possibility' but short of `probability.'" Central Mortgage, 2011 WL 3612992, at *5 n.13.

[54] Id. at *5.

[55] Id.

[56] Id.

[57] McPadden v. Sidhu, 964 A.2d 1262, 1269 (Del. Ch. 2008).

[58] Id.

[59] In re J.P. Morgan Chase & Co. S'holder Litig., 906 A.2d 808, 820 (Del. Ch. 2005) (quoting Jacobs v. Yang, 2004 WL 1728521, at *2 (Del. Ch. Aug. 2, 2004), aff'd, 867 A.2d 902 (Del. 2005)).

[60] In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 120 (Del. Ch. 2009).

[61] Ch. Ct. R. 23.1(a).

[62] Citigroup, 964 A.2d at 120-21 (internal quotations omitted); McPadden, 964 A.2d at 1269.

[63] Beam v. Stewart, 845 A.2d 1040, 1048 (Del. 2004).

[64] Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).

[65] Citigroup, 964 A.2d at 120.

[66] 634 A.2d 927 (Del. 1993).

[67] Id. at 934.

[68] Compl. ¶ 153.

[69] Compl. ¶¶ 169-79.

[70] Compl. ¶ 152.

[71] Beneville v. York, 769 A.2d 80, 82 (Del. Ch. 2000).

[72] Beam, 845 A.2d at 1049; Aronson, 473 A.2d at 812 (To be considered disinterested, "directors can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally.").

[73] Aronson, 473 A.2d at 816.

[74] Compl. ¶¶ 17-26.

[75] See In re The Limited, Inc. S'holders Litig., 2002 WL 537692, at *7 (Del Ch. Mar. 27, 2002) ("[W]here the challenged actions are those of a board consisting of an even number of directors, plaintiffs meet their burden of demonstrating the futility of making demand on the board by showing that half of the board was either interested or not independent.").

[76] As an initial matter, the Plaintiffs fail to plead particularized facts that adequately create a reasonable doubt in regard to the Goldman Foundation's independence from Goldman. The Plaintiffs state that the Goldman Foundation's president is a managing director of Goldman and that, of the Goldman Foundation's eight board members, four "are or were managing directors of the Company." Compl. ¶ 155 (emphasis added). From the phrase "are or were," I can infer that at least one of the four board members affiliated with Goldman is no longer a managing director of Goldman; therefore, the Goldman Foundation's board had at least four members unaffiliated with Goldman and at least one member who was no longer affiliated with Goldman. Presumably these directors are independent and bound by the duties of loyalty and care to the Goldman Foundation. The Plaintiffs offer only conclusory statements that Goldman's management controls the Goldman Foundation. Without more, I have no basis to make an inference that Goldman's management dominated or controlled the Goldman Foundation. Regardless, even if the Plaintiffs had made an adequate showing that the Goldman Foundation was controlled by Goldman's management, the Plaintiffs do not plead particularized facts that create a reasonable doubt that the Defendants were interested or lacked independence based on the contributions from the Goldman Foundation, as described below.

[77] Compl. ¶ 17.

[78] Id.

[79] Compl. ¶ 157.

[80] The Plaintiffs do not state the amount that Goldman donated, only that it was "substantial." Id.

[81] Id.

[82] Compl. ¶ 163.

[83] S. Muoio & Co. LLC v. Hallmark Entm't Inv. Co., 2011 WL 863007 (Del. Ch. Mar. 09, 2011).

[84] Hallmark, 2011 WL 863007, at *10.

[85] J.P. Morgan, 906 A.2d at 808.

[86] Id. at 814-15.

[87] Id.

[88] Id.

[89] The Plaintiffs state that "[t]he Foundation's contributions to their fund raising responsibilities were material" because "[t]he SEC views a contribution for each director to be material if it equals or exceeds $10,000 per year." Compl. ¶ 163. The Plaintiffs argument is misguided. The Plaintiffs base this argument on 17 C.F.R. § 229.402(k)(2)(vii), which addresses director disclosure of perquisites and other benefits. As a threshold matter, 17 C.F.R. § 229.402(k)(2)(vii) is not Delaware law, does not define "materiality," and does not say that amounts over $10,000 are material. 17 C.F.R. § 229.402(k)(2)(vii) merely provides instruction for disclosure of perquisites and other benefits over $10,000. In any event, the Plaintiffs fail to provide any facts showing that the amounts would be material to any of the charitable organizations or the directors.

[90] Compl. ¶ 21.

[91] Id.

[92] Compl. ¶ 159.

[93] Id.

[94] Id.

[95] Id.

[96] Id.

[97] Compl. ¶ 22.

[98] Johnson is listed as both an Audit Committee Defendant and a Compensation Committee Defendant. Compl. ¶¶ 32-33. The Plaintiffs state in Compl. ¶ 22., which discusses Johnson's role at Goldman, that "Defendant Dahlback has served as a member of both the Audit Committee and the Compensation Committee during the relevant period." I assume that the Plaintiffs made a typographical error and meant to refer to Johnson rather than Dahlback.

[99] Compl. ¶ 158.

[100] Id.

[101] Compl. ¶ 23.

[102] Id.

[103] Compl. ¶ 161; see Compl. ¶ 156.

[104] Compl. ¶ 161.

[105] Compl. ¶ 26.

[106] Id.

[107] Compl. ¶ 162.

[108] Id.

[109] Though the Plaintiffs do not make an explicit statement in the complaint, I make a reasonable inference that Simmons role, as an employee of the University, is different from the roles of other defendants who sit on charitable boards.

[110] Compl. ¶ 19.

[111] Id.

[112] Compl. ¶ 160.

[113] Id.

[114] Id. (emphasis added). The use of the word "has" does not necessarily suggest that Goldman's investment currently is this amount, nor does it indicate that such funds were invested during the relevant period.

[115] Compl. ¶ 18.

[116] Id.

[117] Compl. ¶ 165. The complaint also alleges that Dahlback was an executive director of a second entity, "Thisbe AB." Id.

[118] Id.

[119] White v. Panic, 793 A.2d 356, 366 (Del. Ch. 2000).

[120] Compl. ¶ 24.

[121] Id.

[122] Compl. ¶ 166.

[123] Id.

[124] J.P. Morgan, 906 A.2d at 822.

[125] If anything, the Plaintiffs' allegations suggest that Goldman may be dependent on Mittal for future fees generated by underwriting his debt offerings.

[126] Aronson, 473 A.2d at 814; Brehm v. Eisner, 746 A.2d 244, 256 (Del. 2000).

[127] J.P. Morgan, 906 A.2d at 824 (quoting In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 286 (Del. Ch. 2003) (Disney II)).

[128] In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 755 (Del. Ch. 2005) (Disney III).

[129] Compl. ¶ 170.

[130] See Compl. ¶¶ 169-79.

[131] Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006).

[132] In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006) (Disney IV).

[133] Id.

[134] See Id. at 66.

[135] Id.

[136] Compl. ¶ 172.

[137] Compl. ¶ 176. Actually, the percentage of revenue devoted to compensation was 44%, 48%, and 36% for the years 2007, 2008, and 2009, respectively. Compl. ¶ 123.

[138] In actuality, of course, a drop in revenue does have a direct negative impact on employees, because their income is tied to revenue.

[139] Compl. ¶ 123.

[140] See Compl. ¶¶ 169-76.

[141] Compl. ¶ 89.

[142] Brehm, 746 A.2d at 259.

[143] Compl. ¶ 171.

[144] Id.

[145] Compl. ¶¶ 7, 131; see also Compl. ¶¶ 104-06.

[146] Compl. ¶ 89.

[147] Compl. ¶¶ 85-88

[148] Compl. ¶ 89.

[149] Id.

[150] Compl. ¶¶ 86, 89, 113, 115.

[151] See Brehm, 746 A.2d at 259 ("[T]he standard for judging the informational component of the directors' decisionmaking does not mean that the Board must be informed of every fact.").

[152] Citigroup, 964 A.2d at 136 (quoting White v. Panic, 783 A.2d 543, 554 n.36 (Del. 2001)).

[153] Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997).

[154] Id.

[155] Id.

[156] Brehm, 746 A.2d at 263 (internal quotations omitted).

[157] Compl. ¶¶ 119-20.

[158] Compl. ¶ 91.

[159] Compl. ¶ 119.

[160] Compl. ¶¶ 117-18.

[161] Compl. ¶ 117. The Defendants dispute the Plaintiffs allegations that Goldman's compensation scheme is equal to 2% of net assets under management and 45% of the net income produced. In the Defendants' reply brief, in further support of their motion to dismiss the second amended complaint, the Defendants state that if a 2 and 20 compensation scheme would have been used the total 2009 compensation awarded by Goldman would have been $19.7 billion, as opposed to the $16.2 billion actually awarded. Regardless, for the reasons I have noted above, I conclude that the Plaintiffs have not pled particularized facts necessary to carry their burden.

[162] Compl. ¶ 118.

[163] Saxe v. Brady, 184 A.2d 602, 610 (Del. Ch. 1962).

[164] Compl. ¶ 126.

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

[166] Id.

[167] Id. (quoting In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 362 (Del. Ch. 1998) (Disney I)).

[168] Compl. ¶ 92.

[169] Lewis, 699 A.2d at 336.

[170] In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).

[171] In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *12 (Del. Ch. Jan. 11, 2010).

[172] Rales, 634 A.2d at 934.

[173] Id.

[174] In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *12 (internal quotations omitted; emphasis added); Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003) ("[I]f the directors face a "substantial likelihood" of personal liability, their ability to consider a demand impartially is compromised under Rales, excusing demand.").

[175] Guttman, 823 A.2d at 501.

[176] Id.

[177] In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *12; see also Citigroup, 964 A.2d at 124-25.

[178] Caremark, 698 A.2d at 970.

[179] Id.

[180] Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).

[181] Caremark, 698 A.2d at 971; see also Stone, 911 A.2d at 370 ("Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.").

[182] The Plaintiffs argue that under the facts pled here, I should impose an oversight requirement higher than that required by the standard Caremark analysis. At oral argument the Plaintiffs asserted that Forsythe v. ESC Fund Mgmt. Co. (U.S.), Inc., 2007 WL 2982247 (Del. Ch. Oct. 9, 2007), calls for a heightened level of oversight by directors when management's incentives are not aligned with those of the shareholders. In Forsythe, the Court addressed whether a partnership's general partner violated its oversight duty to the partnership. The Forsythe Court decided that the language of the partnership agreement, rather than the common law, provided the proper standard of liability, but it also noted that a Caremark analysis would be not applicable because "Caremark rests importantly on the observation that corporate boards sit atop command-style management structures in which those to whom management duties are delegated generally owe their loyalty to the corporation," a structure unlike that in the Forsythe partnership. 2007 WL 2982247, at *7. Instead, Forsythe involved a "nominally independent general partner" that had "delegated nearly all of its managerial responsibilities to conflicted entities who acted through persons employed by and loyal to a third party." Id. The holding in Forsythe is, therefore, by its own terms not applicable to directors in a hierarchical corporation.

[183] See Stone, 911 A.2d 362 (failure to monitor violations of the Bank Secrecy Act); In re Am. Int'l Group, Inc., 965 A.2d 763 (Del Ch. 2009) (failure to monitor illegal and fraudulent transactions); David B. Shaev Profit Sharing Account v. Armstrong, 2006 WL 391931 (Del. Ch. Feb. 13, 2006) (failure to monitor fraudulent business practices); Caremark, 698 A.2d 959 (failure to monitor violations of the Anti-Referral Payments Law).

[184] Cf. Citigroup, 964 A.2d at 123 (dealing with a failure to monitor business risk).

[185] Stone, 911 A.2d at 370.

[186] Compl. ¶ 186.

[187] See Matt Taibbi, The Great American Bubble Machine, Rolling Stone Magazine, July 9-23, 2009, at 52 ("[Goldman] is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.").

[188] Compl. ¶¶ 147, 151.

[189] Compl. ¶ 151.

[190] In re Massey Energy, 2011 WL 2176479 at *20 (Del. Ch. May 31, 2011).

[191] Compl. ¶ 75.

[192] Id.

[193] Id.

[194] Id.

[195] See generally In re Massey Energy, 2011 WL 2176479, at *16.

[196] Compl. ¶ 52.

[197] In re Massey Energy, 2011 WL 2176479, at *22.

[198] Compl. ¶ 75.

[199] Compl. ¶ 65.

[200] Id.

[201] Id.

[202] Compl. ¶ 69.

[203] Compl. ¶ 72.

[204] Compl. ¶ 73.

[205] Id.

[206] See Stone, 911 A.2d at 373 (holding that in the absence of "red flags," courts assess bad faith of the board only in the context of actions to insure that a reasonable reporting system exists, and not by assessing adverse outcomes).

[207] Compl. ¶ 75.

[208] Citigroup, 964 A.2d at 126.

[209] Caremark, 698 A.2d at 970 (emphasis added).

[210] Citigroup, 964 A.2d at 131.

[211] Id. at 126.

[212] Id.

[213] Id.

[214] Compl. ¶ 131, see Compl. ¶¶ 93-141.

[215] Compl. ¶¶ 133-34.

[216] Id. at 124.

[217] While a valid claim against a board of directors in a hierarchical corporation for failure to monitor risk undertaken by corporate employees is a theoretical possibility, it would be, appropriately, a difficult cause of action on which to prevail. Assuming excessive risk-taking at some level becomes the misconduct contemplated by Caremark, the plaintiff would essentially have to show that the board consciously failed to implement any sort of risk monitoring system or, having implemented such a system, consciously disregarded red flags signaling that the company's employees were taking facially improper, and not just ex-post ill-advised or even bone-headed, business risks. Such bad-faith indifference would be formidably difficult to prove.

This heavy burden serves an important function in preserving the effectiveness of 8 Del. C. § 102(b)(7) exculpatory provisions. If plaintiffs could avoid the requirement of showing bad faith by twisting their duty of care claims into Caremark loyalty claims, such a scenario would eviscerate the purpose of 8 Del. C. § 102(b)(7) and could potentially chill the service of qualified directors.

[218] Citigroup, 964 A.2d at 124.

[219] Compl. ¶ 147.

[220] Compl. ¶ 59.

[221] Id.

[222] Compl. ¶¶ 60-61.

[223] Compl. ¶ 147.

[224] Compl. ¶ 148.

[225] Compl. ¶ 149.

[226] Compl. ¶¶ 64, 77, 84.

[227] Compl. ¶ 78 (internal quotations omitted).

[228] Compl. ¶ 147.

[229] Citigroup, 964 A.2d at 131.

[230] Id. at 126.

[231] Citigroup, 964 A.2d at 139.

Joseph A. Rosenthal (argued), and Kevin Gross of Morris, Rosenthal, Monhait & Gross, P.A., Wilmington, and Mordecai Rosenfeld, New York City, on behalf of appellant.

Clark W. Furlow (argued), of Lassen, Smith, Katzenstein & Furlow, Wilmington, Wallace L. Timmeny (argued), James E. Ballowe, Jr. of McGuire, Woods, Battle & Booth, Washington, D.C., and F.L. Peter Stone of Connolly, Bove, Lodge & Hutz, Wilmington, on behalf of appellees.

Before HORSEY, WALSH and HOLLAND, Justices.

[769] HOLLAND, Justice:

This is an appeal from an order of the Court of Chancery dismissing a derivative action filed by the plaintiff-appellant, Ted Spiegel ("Spiegel"), a shareholder of Waste Management, Inc. ("Waste Management"). In his complaint, Spiegel alleged that Dean L. Buntrock ("Buntrock"), Chairman of the Board of Directors and Chief Executive Officer of Waste Management; Jerry E. Dempsey ("Dempsey"), Vice Chairman; Peter H. Huizenga ("Huizenga"), Vice President and Secretary; and James E. Koenig ("Koenig"), Staff Vice President^[1] (collectively "management defendants"), improperly acquired stock in ChemLawn Corporation ("ChemLawn"), based upon inside information, during the two years immediately preceding Waste Management's tender [770] offer for ChemLawn. Spiegel sought to compel the management defendants to account to Waste Management for the personal profits they made upon the sale of their ChemLawn stock.

The underlying issue in this controversy is the often debated subject of when the requirement that a stockholder make demand on a board of directors, prior to filing a derivative lawsuit for the benefit of a corporation, is excused and when a demand, which has been made, is properly refused. Superimposed upon the "demand excused/demand refused" debate^[2] are additional issues relating to the use of a special litigation committee by the Board of Waste Management, and the propriety of continuing to argue that demand was excused, after a demand has been made. All of the issues raised implicate the proper standard of judicial review.

This case presented the Court of Chancery with a procedural paradox in that each party's argument was the antithesis of their action. Spiegel contended that demand was excused. However, when his failure to make a pre-suit demand was raised by the Board of Waste Management ("Board") as a defense, Spiegel responded by filing a demand. The Board contended that demand was required, because it was disinterested and capable of responding to Spiegel's request for legal action. However, when a demand for such action was made by Spiegel, the Board responded by appointing a special litigation committee with complete authority to review and act upon Spiegel's request. Ultimately, each party used their opponent's legal sword as their own legal shield. Spiegel argued that by appointing a special litigation committee, the Board conceded that demand was excused and the Board argued that by filing a demand Spiegel had admitted that one was required.

The Court of Chancery carefully reviewed the allegations in Spiegel's complaint and found that demand was not excused. Thereafter, the Court of Chancery proceeded to examine the post-suit demand for legal action, which was sent to the Board by Spiegel, and the decision to refuse that demand. The Court of Chancery held that the decision to refuse Spiegel's demand was subject to review according to the traditional business judgment rule, notwithstanding the fact that the Board had delegated its authority to act on Spiegel's demand to a special litigation committee. Applying the traditional business judgment rule, the Court of Chancery held that Spiegel's demand, for the Board to take legal action on behalf of Waste Management, was properly refused.

On appeal, Spiegel contends that, even though he made a demand, given the facts of this case, demand was excused nevertheless. Therefore, Spiegel argues that the Court of Chancery should have reviewed the Board's motion to dismiss his complaint according to the procedures established in Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779 (1981), rather than the traditional business judgment rule. Alternatively, Spiegel contends that even if the Zapata procedures are not applicable in this case, the Court of Chancery erred in dismissing his derivative complaint because Waste Management failed to meet its burden under Chancery Court Rule 56 of showing that there were no genuine issues of material fact.

We find that the record supports both of the Court of Chancery's rulings. Consequently, it is not necessary to address the other issues raised by Spiegel. We find that the Court of Chancery's decision to dismiss Spiegel's complaint should be affirmed.

Facts

Waste Management is a Delaware corporation headquartered in Oak Brook, Illinois. It provides domestic and international waste removal and disposal services. In the spring of 1984, Waste Management decided to diversify its operations by expanding into new service areas.

[771] In an effort to accomplish its goal, Waste Management hired Dempsey, who had led the successful diversification of Borg Warner Corporation.^[3] Buntrock requested Dempsey to perform a study of service industries which might be of interest to Waste Management. Dempsey retained the consulting division of Arthur Andersen & Co. to assist him with the study.

Dempsey prepared two reports, dated February 8, 1985 and March 13, 1985. The reports were titled "Waste Management, Inc. Acquisition Project Meeting." Both reports were presented to the Board by Dempsey. ChemLawn, a leader in the lawn care industry, was among eight companies included in each initial analysis. During the next two years, several additional reports were prepared to assist the Board in evaluating companies for potential acquisition.

Waste Management's interest in Chem-Lawn gradually intensified until on February 26, 1987, it launched a cash tender offer for ChemLawn at $27.00 per share.^[4] The tender offer included a disclosure that the management defendants owned shares of ChemLawn stock, which they had acquired during the prior two years.^[5] Waste Management's tender offer proved to be unsuccessful.

ChemLawn was purchased by EcoLab, Inc. for $36.50 per share. On March 30, 1987, the Wall Street Journal carried an article entitled "ChemLawn's Sale Could Yield $1 Million In Profit for Officials of Thwarted Suitor."^[6] That same day, Spiegel filed the action against Waste Management, and its directors, that is the subject of this appeal.

On April 30, 1987, the Board filed a motion to dismiss Spiegel's complaint pursuant to Court of Chancery Rule 23.1. The basis for that motion was that Spiegel had failed to make a demand upon the Board prior to instituting his derivative suit and had failed to allege with particularity facts demonstrating that such a demand would have been futile. See Ch.Ct.R. 23.1.^[7] The Board's motion also sought dismissal of the action against the seven disinterested directors because Spiegel's complaint alleged no wrongdoing by them.

Spiegel did not immediately contest the Board's motion to dismiss in the Court of Chancery.^[8] Instead, Spiegel responded by making a demand to the Board in a letter which stated:

[772] On behalf of Ted Spiegel, a shareholder of Waste Management, Inc., we hereby formally demand that the Board of Directors take all appropriate action to redress the wrongs as alleged in the enclosed complaint.

In response to Spiegel's demand letter, the Board established a special litigation committee of outside directors (the "Committee") "for the purpose of conducting an independent review of the transactions in the common stock of ChemLawn Corporation by officers of the Company."^[9] "Pursuant to Section 141(c) of the Delaware General Corporation Law and [Waste Management's] by-laws," the Board delegated authority to the Committee "to determine, as a result of its independent review, whatever action may be appropriate in the interest of the Company...."

The Committee conducted an investigation into Spiegel's allegations that spanned over five months. The Committee was represented by its own independent counsel, a Washington, D.C., attorney who was the former Deputy Director of Enforcement at the Securities and Exchange Commission, and who now specializes in securities law in private practice. The Committee interviewed a great many people, both within and without Waste Management.^[10] It also reviewed volumes of documents.

The Committee's report found that Waste Management had a continuing low level interest in ChemLawn, as one of many possible acquisition targets, throughout the two-year period in question, but that there was never any "serious interest" until January and February of 1987. On the basis of its investigation, and its analysis of the applicable law, the Committee concluded that it would not be in the best interests of Waste Management and its stockholders to pursue Spiegel's derivative action. The Committee's report stated, in part:

The Committee has determined to seek dismissal of the complaints in the pending derivative litigation. The Committee believes that the best interests of the Company would be furthered by terminating rather than pursuing the derivative litigation.... There is no question that ... discovery would be disruptive and burdensome in the extreme to the Company, its employees, and its directors. In addition, the publicity which would accompany the continuation of the lawsuit would result in immediate damage to the Company's goodwill and reputation with its shareholders, its customers, and the investment community, even though the allegations in the complaint ultimately proved meritless.

Against these burdens, the Committee has weighed the potential for success by the plaintiffs on their claim of insider trading and has concluded that the plaintiffs have proffered no evidence, and the Committee in its investigation has uncovered no evidence, that would support this serious charge of unlawful conduct.

Consequently, the Committee, acting for the Board, filed a motion on behalf of Waste Management, in the Court of Chancery to dismiss or, alternatively, for summary judgment, along with the affidavits of the Committee members and the entire report which summarized its findings and analysis.

Derivative Action/Demand Requirement

A basic principle of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, [773] manage the business and affairs of the corporation. Paramount v. Time, Del. Supr., 571 A.2d 735, 738, 751 (1990); Mills Acquisition Co. v. Macmillan, Inc., Del. Supr., 559 A.2d 1261, 1280 (1989); Kaplan v. Peat, Marwick, Mitchell & Co., Del. Supr., 540 A.2d 726, 729 (1988); Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811-12 (1984). "The exercise of this managerial power is tempered by fundamental fiduciary obligations owed by the directors to the corporation and its shareholders." Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 729. The decision to bring a law suit or to refrain from litigating a claim on behalf of a corporation is a decision concerning the management of the corporation. Zapata Corp. v. Maldonado, 430 A.2d at 782. Consequently, such decisions are part of the responsibility of the board of directors. 8 Del.C. § 141(a).^[11]

Nevertheless, a shareholder may file a derivative action to redress an alleged harm to the corporation. The nature of the derivative action is two-fold.

First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.

Aronson v. Lewis, 473 A.2d at 811. In essence, it is a challenge to a board of directors' managerial power. Pogostin v. Rice, 480 A.2d at 624. Thus, by its very nature, "the derivative action impinges on the managerial freedom of directors." Id. In fact, the United States Supreme Court has noted that the shareholder derivative action "could, if unrestrained, undermine the basic principle of corporate governance that the decisions of a corporation — including the decision to initiate litigation — should be made by the board of directors or the majority of shareholders." Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 531, 104 S.Ct. 831, 836, 78 L.Ed.2d 645 (1984) (citing Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827 (1882)). See Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 730.

"Because the shareholders' ability to institute an action on behalf of the corporation inherently impinges upon the directors' power to manage the affairs of the corporation the law imposes certain prerequisites on a stockholder's right to sue derivatively." Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 730 (citing Pogostin v. Rice, 480 A.2d at 624); Aronson v. Lewis, 473 A.2d at 811. Chancery Court Rule 23.1 requires that shareholders seeking to assert a claim on behalf of the corporation must first exhaust intracorporate remedies by making a demand on the directors to obtain the action desired, or to plead with particularity why demand is excused. Ch. Ct.R. 23.1; Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 730. See also Aronson v. Lewis, 473 A.2d at 811-812; Zapata Corp. v. Maldonado, 430 A.2d at 783.^[12]

The purpose of pre-suit demand is to assure that the stockholder affords the corporation the opportunity to address an alleged wrong without litigation, to decide whether to invest the resources of the corporation in litigation, and to control any litigation which does occur. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 730.^[13] "[B]y promoting this form of alternate dispute resolution, rather than immediate recourse to litigation, the demand requirement is a recognition of the fundamental precept that directors manage the business and affairs of corporations." Aronson v. Lewis, 473 A.2d at 812.

Standard Of Review Demand Excused/Demand Refused

Since a conscious decision by a board of directors to refrain from acting [774] may be a valid exercise of business judgment, "where demand on a board has been made and refused, [courts] apply the business judgment rule in reviewing the board's refusal to act pursuant to a stockholder's demand" to file a lawsuit. Id. at 813 (citing Zapata Corp. v. Maldonado, 430 A.2d at 784 & n. 10). The business judgment rule is a presumption that in making a business decision, not involving self-interest, 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. Grobow v. Perot, Del.Supr., 539 A.2d 180, 187 (1988); Aronson v. Lewis, 473 A.2d at 812.^[14] "The burden is on the party challenging the decision to establish facts rebutting th[is] presumption." Aronson v. Lewis, 473 A.2d at 812. Thus, the business judgment rule operates as a judicial acknowledgement of a board of directors' managerial prerogatives. Id.

Spiegel submits that judicial review according to the traditional business judgment rule was inappropriate in his case. Spiegel sets forth two separate arguments in support of his position. First, that the allegations set forth in his complaint support a finding that demand was excused, according to this Court's holding in Aronson, notwithstanding the fact that he made a demand upon the Board. Second, and alternatively, that by appointing a special litigation committee with full authority to respond to his demand, the Board waived its right to challenge his allegation that demand was excused, and thereby invoked the special procedures for judicial review established in Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779 (1981). We shall examine each of Spiegel's contentions.

Demand Made/Futility Waived

Spiegel filed a derivative action on behalf of Waste Management, alleging that a presuit demand on the Board was excused, i.e., would have been a futile gesture. However, Spiegel then filed a demand with the Board to take legal action and "redress the wrongs" set forth in his complaint. Spiegel alleges that he was entitled to simultaneously argue these inconsistent arguments. The Board argues that when Spiegel filed his demand, he waived his right to continue asserting that demand was excused. The Court of Chancery gave implicit recognition to the validity of Spiegel's position by examining the merits of both of his arguments.^[15]

"When deciding a motion to dismiss for failure to make a demand under Chancery Rule 23.1 the record before the court must be restricted to the allegations of the complaint." Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 727-28. See also Grobow v. Perot, 539 A.2d at 187; Pogostin v. Rice, 480 A.2d at 622-24; Aronson v. Lewis, 473 A.2d at 809. In determining demand futility, the Court of Chancery must decide whether, under the particularized facts alleged in the complaint:

[A] reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.

Aronson v. Lewis, 473 A.2d at 814. In this case, the Court of Chancery concluded that the facts alleged in Spiegel's complaint did not raise a reasonable doubt that the Board was disabled from responding to Spiegel's demand and passing upon whether it was in Waste Management's interest to pursue Spiegel's claims.

Spiegel argues that, even though he made a demand, the Court of Chancery properly reviewed the merits of his complaint, which alleged that demand was excused. Spiegel submits that demand [775] should be encouraged by permitting a demand to be made, while at the same time permitting the argument, that demand was excused, to be preserved. Spiegel finds some support for his position in other jurisdictions. See Bach v. National W. Life Ins. Co., 810 F.2d 509, 513 (5th Cir.1987); Joy v. North, 692 F.2d 880, 888 n. 7 (2d Cir.1982), cert. denied, 460 U.S. 1051, 103 S.Ct. 1498, 75 L.Ed.2d 930 (1983); Alford v. Shaw, 72 N.C.App. 537, 324 S.E.2d 878, 883 n. 2 (1985), aff'd and modified on other grounds, 320 N.C. 465, 358 S.E.2d 323 (1987). However, this Court has held that by making a demand, a shareholder thereby makes his original contention, that demand was excused, moot. Stotland v. GAF Corp., Del.Supr., 469 A.2d 421 (1983).

In Stotland, the shareholders' original derivative complaint did not allege that a demand had been made on the corporation's board of directors. The Court of Chancery denied the shareholders' motion to amend their complaint, and ordered the action dismissed due to the shareholders' failure either to make a demand or properly demonstrate its futility. Id. at 422. Following the dismissal, the shareholders made a demand on the board, and then filed an appeal from the dismissal, on grounds that a demand would have been futile. The board of directors appointed a special litigation committee to review the demand. That process was still in progress at the time when the shareholders' appeal was heard by this Court. We concluded that, by making the demand, the shareholder mooted his appeal, which was based on the issue of demand futility. We held that "once a demand has been made, absent a wrongful refusal, the stockholders' ability to initiate a derivative suit is terminated." Id. at 422 (citing Zapata Corp. v. Maldonado, 430 A.2d at 784-86).

This Court has recently held that when a board of directors is confronted with a derivative action asserted on its behalf, it cannot stand neutral. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 731. The Board "must affirmatively object to or support the continuation of the [derivative] litigation." Id. Similarly, a stockholder who asserts a derivative claim cannot stand neutral, in effect, with respect to the board of directors' ability to respond to a request to take legal action, by simultaneously making a demand for such action and continuing to argue that demand is excused.

By making a demand, a stockholder tacitly acknowledges the absence of facts to support a finding of futility. Cf. Kaplan v. Peat, Marwick, Mitchell & Co., 540 A.2d at 731. Thus, when a demand is made, the question of whether demand was excused is moot. Stotland v. GAF Corp., 469 A.2d at 422-23. Our decision in Stotland is applicable to Spiegel's case. Therefore, we hold once Spiegel made a demand, it was unnecessary for the Court of Chancery to consider the merits of Spiegel's argument that demand was excused. Id. at 423.

A shareholder who makes a demand can no longer argue that demand is excused. Id.^[16] The effect of a demand is to place control of the derivative litigation in the hands of the board of directors. Zapata Corp. v. Maldonado, 430 A.2d at 784-86.^[17] Consequently, stockholders who, [776] like Spiegel, make a demand which is refused, subject the board's decision to judicial review according to the traditional business judgment rule. Aronson v. Lewis, 473 A.2d at 813; Zapata Corp. v. Maldonado, 430 A.2d at 784 n. 10.

Special Litigation Committee

Alternatively, Spiegel argues that even though demand was made, the Board admitted that demand was excused by referring his demand to a special litigation committee, and by delegating to that committee the complete power to determine the Board's litigation posture.^[18] Therefore, Spiegel argues that the Board's rejection of his demand was subject to judicial review according to the special procedures set forth in Zapata, and not the traditional business judgment rule.^[19] In support of that position, Spiegel cites Abbey v. Computer & Comm. Tech. Corp., Del.Ch., 457 A.2d 368 (1983). The Court of Chancery found Abbey to be distinguishable and rejected Spiegel's argument. We agree with the Court of Chancery.

The facts upon which the Abbey decision was based are different from the facts of this case. In Abbey, the plaintiff made demand on the corporation's board of directors and then filed suit alleging that demand was excused. The board responded to the complaint in Abbey by appointing a new board member to serve as a one-man special litigation committee, and delegated full authority to him to handle the derivative action. The board in Abbey never made any attempt to address the derivative litigation itself. The Court of Chancery concluded, in Abbey, that the board had, "in effect, conceded its disqualification, and... thereby conceded [that demand was excused and that] the plaintiff [was entitled] to bring the [derivative] suit without awaiting word from it...." 457 A.2d at 374.

This case is the procedural reverse of Abbey. Spiegel filed his derivative suit without first making demand. The Board immediately took charge of the litigation and filed a motion to dismiss Spiegel's complaint for his failure to make a demand in accordance with Rule 23.1. Spiegel responded to the Board's motion by making a demand. In response to Spiegel's demand, the Board created a special litigation committee.

The significance of this procedural distinction was recognized by the Court of Chancery in Richardson v. Graves, Del. Ch., C.A. No. 6617, Longobardi, V.C. (June [777] 17, 1983). The plaintiff in Richardson, like Spiegel, relying on Abbey, argued that the board of directors had conceded that demand was excused as futile by the appointment of a special litigation committee. In Richardson, the Court of Chancery distinguished Abbey on the grounds that the board in Abbey did not file a motion to dismiss pursuant to Rule 23.1 until after it had surrendered exclusive control of the derivative action to a special litigation committee. Richardson v. Graves, slip op. at 10-11. By contrast, the Richardson board, like the Waste Management board, first filed a motion to dismiss Spiegel's complaint due to his failure to make a demand and later, after Spiegel did make a demand, appointed a special litigation committee to respond to that demand. In Richardson, the court held:

[T]he facts here do not support a finding of concession on the part of the Defendants [, the board of directors,] or divestment of their power at the time they moved to dismiss. The Defendants here filed a proper motion to dismiss and consistent with the policy of [Rule] 23.1 must in the first instance be afforded the opportunity to control the litigation.

Richardson v. Graves, slip op. at 11.

In this case, we find that the Court of Chancery properly rejected Spiegel's argument that Abbey stands for the proposition that a board of directors, ipso facto, waives its right to challenge a shareholder plaintiff's allegation that demand is excused by the act of appointing a special litigation committee and delegating to that committee the authority to act on the demand. Not only are the facts in Abbey procedurally different from those of the present case, but Abbey itself specifically recognizes the right of a board of directors to appoint committees to address derivative litigation, without automatically subjecting the committee's decision to the two-tier level of judicial scrutiny established in Zapata. In Abbey, the Court of Chancery properly concluded that the special review procedure which this Court set up in Zapata applies:

only in a situation where, because of some alleged self-interest, the board of directors is disqualified from acting itself. Otherwise, but for the disqualifying self-interest factor, the board could make its decision for itself, whether it chose to do so through a committee or not, and cause an appropriate motion to be made on behalf of the corporation just as in any normal suit in which the corporation was named as a party defendant.

Abbey v. Computer & Comm. Tech. Corp., 457 A.2d at 373. In this case, the Court of Chancery held that the decision of a board of directors to appoint a special litigation committee, with a delegation of complete authority to act on a demand, is not, in all instances, an acknowledgement that demand was excused and ergo that a shareholder's lawsuit was properly initiated as a derivative action. We affirm that holding.

Standard Of Review Demand Refused/Motion To Dismiss

Whenever any action or inaction by a board of directors is subject to review according to the traditional business judgment rule, the issues before the Court are independence, the reasonableness of its investigation and good faith. By electing to make a demand, a shareholder plaintiff tacitly concedes the independence of a majority of the board to respond. Therefore, when a board refuses a demand, the only issues to be examined are the good faith and reasonableness of its investigation.

Absent an abuse of discretion, if the requirements of the traditional business judgment rule are met, the board of directors' decision not to pursue the derivative claim will be respected by the courts. Aronson v. Lewis, 473 A.2d at 812; Zapata Corp. v. Maldonado, 430 A.2d at 784-85. In such cases, a board of directors' motion to dismiss an action filed by a shareholder, whose demand has been rejected, must be granted.^[20] "If Courts would not respect [778] the directors' decision not to file suit, then demand would be an empty formality." Starrels v. First Nat. Bank of Chicago, 870 F.2d 1168, 1174 (7th Cir.1989) (Easterbrook, J., concurring).

The same standard of judicial review is applicable when a board delegates authority to respond to a demand to a special litigation committee. The issues are solely the good faith and the reasonableness of the committee's investigation. Zapata Corp. v. Maldonado, 430 A.2d at 787. "The ultimate conclusion of the [special litigation] committee ... is not subject to judicial review." Id. (emphasis added). Judicial review of the merits of a special litigation committee's decision to refuse a demand is limited to those cases where demand upon the board of directors is excused and the board has decided to regain control of litigation through the use of an independent special litigation committee. Aronson v. Lewis, 473 A.2d at 813-14; Zapata Corp. v. Maldonado, 430 A.2d at 787. Cf. Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 327 (1987).

The Court of Chancery specifically recognized this important distinction. In this case, the Court of Chancery found there was no material dispute that the Board, through its Committee, had "function[ed] effectively ... in a way that fully satisfies the prerequisites for the application of the business judgment rule."^[21] Consequently, the Court of Chancery concluded that, in accordance with the business judgment expressed by the Board, through its Committee, Spiegel's derivative action had to be dismissed. Grobow v. Perot, Del.Supr., 539 A.2d 180 (1988); Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1984). We agree.

Conclusion

For the reasons stated in this opinion, the ultimate decision of the Court of Chancery, dismissing Spiegel's complaint is AFFIRMED.

[1] All of the management defendants, except Koenig, are also directors of Waste Management.

[2] See Dooley & Veasey, The Role of the Board in Derivative Litigation: Delaware Law and the Current ALI Proposals Compared, 44 Bus.Law. 503 (1989). See also Bach v. National W. Life Ins. Co., 810 F.2d 509, 513-14 (5th Cir.1987).

[3] With Dempsey's leadership, Borg Warner Corporation evolved from a primarily manufacturing enterprise, to the point where service industries comprised the majority of its overall operations.

[4] On February 25, 1987, Waste Management sued ChemLawn to invalidate the anti-takeover laws of Ohio, ChemLawn's state of incorporation. ChemLawn counterclaimed, seeking to enjoin Waste Management's takeover bid. Among the allegations in ChemLawn's counterclaim was the charge that Buntrock, Huizenga, Dempsey and Koenig had acquired ChemLawn shares in violation of federal and state prohibitions against trading on inside information. After EcoLab, Inc. acquired ChemLawn, the Ohio litigation was voluntarily dismissed.

[5] The purchases of ChemLawn stock occurred between May 8, 1985, and February 5, 1987. They may be summarized as follows:

Purchaser                    # of Shares
---------                    -----------

Mr. Buntrock*                   35,000
Huizenga                         8,000
Dempsey                          4,000
Koenig                             400

* Mr. Buntrock's total purchases include not only his
personal purchases, but also those made by his wife and
by trust funds established for the Buntrocks' children.

[6] In March and April, 1987, the management defendants tendered all of their 47,400 shares of ChemLawn stock to EcoLab, Inc. during its successful tender offer, at prices ranging from $36.25 to $36.50 per share.

[7] Chancery Court Rule 23.1 states, in part:

The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he [or she] desires from the directors or comparable authority and the reasons for his [or her] failure to obtain the action or for not making the effort.

[8] The Court of Chancery set a brief schedule in order to properly act upon the Board's motion. That brief schedule was apparently abandoned by the parties after Spiegel filed his demand. The Court of Chancery's docket sheet indicates the next action taken with respect to this case was the filing of a motion to dismiss or, alternatively, for summary judgment by a special litigation committee appointed by the Board to investigate and respond to Spiegel's claims.

[9] The Committee's chairman was Lee L. Morgan, the most recent appointee to the Board and the retired chairman of Caterpillar, Inc. The other two members of the Committee were Olin Neill Emmons, a financial analyst and vice-president of Oberweis Securities, Inc., and James R. Peterson, a former officer and director of the Pillsbury Company, R.J. Reynolds Industries, Inc., and the Parker Pen Company.

[10] The Committee interviewed Spiegel's attorney. Spiegel's counsel advised the Committee that the allegations in the complaint were based solely on the article reported on March 30, 1987, in the Wall Street Journal.

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

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

[12] The United States Supreme Court recognized the demand requirement, as an embodiment of the director's prerogative to control a corporation's business and affairs, over a century ago in Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827 (1882).

[13] See DeMott, Demand in Derivative Actions: Problems of Interpretation and Function, 19 U.C. Davis L.Rev. 461, 484-94 (1986).

[14] The protections of the business judgment rule can only be invoked by disinterested directors. Aronson v. Lewis, 473 A.2d at 812, 815 n. 8. However, the fact that all directors are named as defendants in a derivative complaint is not determinative of their lack of independence. Id. at 817-18; Pogostin v. Rice, 480 A.2d at 625.

[15] The federal district court in Delaware has also reviewed a futility of demand argument subsequent to the filing of a demand. Allison on Behalf of G.M.C. v. General Motors Corp., 604 F.Supp. 1106 (D.Del.), aff'd, 782 F.2d 1026 (3d Cir.1985).

[16] The federal district court in Delaware recognized the potential for the establishment of a rule in Delaware that a derivative plaintiff's assertion that demand is excused is mooted once demand is made. Allison on Behalf of G.M.C. v. General Motors Corp., 604 F.Supp. at 1119 n. 12.

[17] "[Stotland] thus treats the demand requirement as an aspect of the allocation of managerial powers within the corporation. The case also creates a substantial practical dilemma for the plaintiff: if no demand is made, the suit may and probably will be dismissed, but once the demand is made, the plaintiff can no longer maintain that demand should be excused." D. DeMott, Shareholder Derivative Actions: Law and Practice, § 5:03 (1987). We recognize this reaffirmation of our decision in Stotland requires a shareholder to make an election between filing a demand and filing a derivative action without a demand. We also recognize that "the entire question of demand futility is inextricably bound to issues of business judgment and the standards of that doctrine's applicability." Aronson v. Lewis, 473 A.2d at 812. However, this shareholder "dilemma" is not a Hobson's choice. "[U]nder Zapata and its progeny, a plaintiff who can establish demand futility not only avoids the need to make a demand which the corporation may refuse, but, at least in Delaware, also may be able to obtain judicial review of the merits of the case as part of the court's evaluation of any motion to terminate made by a special litigation committee acting on behalf of the corporation." D. Block, N. Barton & S. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Directors, 484 (3d Ed. 1989).

[18] A board of directors may delegate its managerial authority to a committee of directors. 8 Del.C. § 141(c). Even when a majority of a board of directors is independent, one advantage of establishing a special litigation committee is to isolate the interested directors from material information during either the investigative or decisional process. Cf. Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261 (1988). In this case, Spiegel emphasizes the difference between a Board's "delegation of its decision-making authority — as opposed to its investigative authority —" to a committee. See D. Block, N. Barton & S. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Directors, 476-77 n. 180, 485-88 (3d Ed.1989). See also, D. Drexler, L. Black, and G. Sparks, Delaware Corporate Law & Practice, § 42.03[2][c] (1990).

[19] As this Court noted in Aronson:

The thrust of Zapata is that in either the demand-refused or the demand-excused case, the board still retains its Section 141(a) managerial authority to make decisions regarding corporate litigation.... Thus, even in a demand-excused case, a board has the power to appoint a committee of one or more independent disinterested directors to determine whether the derivative action should be pursued or dismissal sought. Under Zapata, the Court of Chancery, in passing on a committee's motion to dismiss a derivative action in a demand excused case, must apply a two-step test. First, the court must inquire into the independence and good faith of the committee and review the reasonableness and good faith of the committee's investigation. Second, the court must apply its own independent business judgment to decide whether the motion to dismiss should be granted.

Aronson v. Lewis, 473 A.2d at 813 (citations omitted).

[20] "The function of the business judgment rule is of paramount significance in the context of a derivative action. It comes into play in several ways — in addressing a demand, in the determination of demand futility, in efforts by independent disinterested directors to dismiss the action as inimical to the corporation's best interests, and generally, as a defense to the merits of the suit." Aronson v. Lewis, 473 A.2d at 812. "When used in this manner, the rule is said to be applied `offensively' — it is used not to defend the propriety of the underlying action but rather to secure dismissal of the suit without reaching the merits of the claim." D. Block, N. Barton & S. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Directors, 492 (3d Ed. 1989) (citing D. DeMott, Shareholder Derivative Actions: Law and Practice § 5:04 (1987)); Block & Prussin, Termination of Derivative Suits Against Directors on Business Judgment Grounds: From Zapata to Aronson, 39 Bus.Law. 1503 (1984); Block, Prussin & Wachtel, Dismissal of Derivative Actions Under the Business Judgment Rule: Zapata One Year Later, 38 Bus. Law. 401 (1983); Sparks & Conan, Litigation Committees, 16 Rev.Sec.Reg. 817 (1983); Cox, Searching for the Corporation's Voice in Derivative Suit Litigation: A Critique of Zapata and the ALI Project, 1982 Duke L.J. 959 (1982); Payson, Goldman & Inskip, After Maldonado — The Role of the Special Litigation Committee in the Investigation and Dismissal of Derivative Suits, 37 Bus.Law. 1199 (1982); Veasey, Seeking a Safe Harbor from Judicial Scrutiny of Directors' Business Decisions — An Analytical Framework for Litigation Strategy and Counselling Directors, 37 Bus.Law. 1247 (1982); Block & Prussin, The Business Judgment Rule and Shareholder Derivative Actions: Viva Zapata?, 37 Bus.Law. 27 (1981).

[21] Although the Court of Chancery held that a pre-suit demand was required and not made, it did not dismiss Spiegel's complaint on that basis alone. Thereafter, it re-examined Spiegel's complaint, following the rejection of his post-suit demand, based upon the Committee's motion to dismiss. Cf. Weiss v. Temporary Inv. Fund, Inc., 692 F.2d 928, 943 (3d Cir.1982), aff'g 520 F.Supp. 1098, 1100 (D.Del.1981), vacated and remanded on other grounds, 465 U.S. 1001, 104 S.Ct. 989, 79 L.Ed.2d 224 (1984); Grossman v. Johnson, 674 F.2d 115, 125-26 (1st Cir.), cert. denied, 459 U.S. 838, 103 S.Ct. 85, 74 L.Ed.2d 80 (1982).

Robert K. Payson, (argued) of Potter, Anderson & Corroon, Wilmington, and Thomas F. Curnin, Thomas J. Kavaler, P. Kevin Castel and Edward P. Krugman of Cahill, Gordon & Reindel, New York City, of counsel, for defendant-appellant.

Charles F. Richards, Jr. of Richards, Layton & Finger, Wilmington, for individual defendants.

Irving Morris and Joseph A. Rosenthal of Morris & Rosenthal, Wilmington, Sidney L. Garwin (argued), and Bruce E. Gerstein of Garwin, Bronzaft & Gerstein, New York City, of counsel, for plaintiff-appellee.

Arthur G. Connolly, Jr. of Connolly, Bove & Lodge, Wilmington, for amici curiae.

Before DUFFY, QUILLEN and HORSEY, JJ.

[780] QUILLEN, Justice:

This is an interlocutory appeal from an order entered on April 9, 1980, by the Court of Chancery denying appellant-defendant Zapata Corporation's (Zapata) alternative motions to dismiss the complaint or for summary judgment. The issue to be addressed has reached this Court by way of a rather convoluted path.

In June, 1975, William Maldonado, a stockholder of Zapata, instituted a derivative action in the Court of Chancery on behalf of Zapata against ten officers and/or directors of Zapata, alleging, essentially, breaches of fiduciary duty. Maldonado did not first demand that the board bring this action, stating instead such demand's futility because all directors were named as defendants and allegedly participated in the acts specified.^[1] In June, 1977, Maldonado commenced an action in the United States District Court for the Southern District of New York against the same defendants, save one, alleging federal security law violations as well as the same common law claims made previously in the Court of Chancery.

[781] By June, 1979, four of the defendant-directors were no longer on the board, and the remaining directors appointed two new outside directors to the board. The board then created an "Independent Investigation Committee" (Committee), composed solely of the two new directors, to investigate Maldonado's actions, as well as a similar derivative action then pending in Texas, and to determine whether the corporation should continue any or all of the litigation. The Committee's determination was stated to be "final, ... not ... subject to review by the Board of Directors and ... in all respects ... binding upon the Corporation."

Following an investigation, the Committee concluded, in September, 1979, that each action should "be dismissed forthwith as their continued maintenance is inimical to the Company's best interests...." Consequently, Zapata moved for dismissal or summary judgment in the three derivative actions. On January 24, 1980, the District Court for the Southern District of New York granted Zapata's motion for summary judgment, Maldonado v. Flynn, S.D.N.Y., 485 F.Supp. 274 (1980), holding, under its interpretation of Delaware law, that the Committee had the authority, under the "business judgment" rule, to require the termination of the derivative action. Maldonado appealed that decision to the Second Circuit Court of Appeals.

On March 18, 1980, the Court of Chancery, in a reported opinion, the basis for the order of April 9, 1980, denied Zapata's motions, holding that Delaware law does not sanction this means of dismissal. More specifically, it held that the "business judgment" rule is not a grant of authority to dismiss derivative actions and that a stockholder has an individual right to maintain derivative actions in certain instances. Maldonado v. Flynn, Del.Ch., 413 A.2d 1251 (1980) (herein Maldonado). Pursuant to the provisions of Supreme Court Rule 42, Zapata filed an interlocutory appeal with this Court shortly thereafter. The appeal was accepted by this Court on June 5, 1980. On May 29, 1980, however, the Court of Chancery dismissed Maldonado's cause of action, its decision based on principles of res judicata, expressly conditioned upon the Second Circuit affirming the earlier New York District Court's decision.^[2] The Second Circuit appeal was ordered stayed, however, pending this Court's resolution of the appeal from the April 9th Court of Chancery order denying dismissal and summary judgment.

Thus, Zapata's observation that it sits "in a procedural gridlock" appears quite accurate, and we agree that this Court can and should attempt to resolve the particular question of Delaware law.^[3] As the Vice Chancellor noted, 413 A.2d at 1257, "it is the law of the State of incorporation which determines whether the directors have this power of dismissal, Burks v. Lasker, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979)". We limit our review in this interlocutory appeal to whether the Committee has the power to cause the present action to be dismissed.

We begin with an examination of the carefully considered opinion of the Vice Chancellor which states, in part, that the "business judgment" rule does not confer power "to a corporate board of directors to terminate a derivative suit", 413 A.2d at 1257. His conclusion is particularly pertinent because several federal courts, applying Delaware law, have held that the business judgment rule enables boards (or their committees) to terminate derivative suits, decisions now in conflict with the holding below.^[4]

[782] As the term is most commonly used, and given the disposition below, we can understand the Vice Chancellor's comment that "the business judgment rule is irrelevant to the question of whether the Committee has the authority to compel the dismissal of this suit". 413 A.2d at 1257. Corporations, existing because of legislative grace, possess authority as granted by the legislature. Directors of Delaware corporations derive their managerial decision making power, which encompasses decisions whether to initiate, or refrain from entering, litigation,^[5] from 8 Del.C. § 141 (a).^[6] This statute is the fount of directorial powers. The "business judgment" rule is a judicial creation that presumes propriety, under certain circumstances, in a board's decision.^[7] Viewed defensively, it does not create authority. In this sense the "business judgment" rule is not relevant in corporate decision making until after a decision is made. It is generally used as a defense to an attack on the decision's soundness. The board's managerial decision making power, however, comes from § 141(a). The judicial creation and legislative grant are related because the "business judgment" rule evolved to give recognition and deference to directors' business expertise when exercising their managerial power under § 141(a).

In the case before us, although the corporation's decision to move to dismiss or for summary judgment was, literally, a decision resulting from an exercise of the directors' (as delegated to the Committee) business judgment, the question of "business judgment", in a defensive sense, would not become relevant until and unless the decision to seek termination of the derivative lawsuit was attacked as improper. Maldonado, 413 A.2d at 1257. Accord, Abella v. Universal Leaf Tobacco Co., Inc., E.D.Va., 495 F.Supp. 713 (1980) (applying Virginia law); Maher v. Zapata Corp., S.D.Tex., 490 F.Supp. 348 (1980) (applying Delaware law). See also, Dent, supra note 5, 75 Nw.U.L. Rev. at 101-02, 135. This question was not reached by the Vice Chancellor because he determined that the stockholder had an individual right to maintain this derivative action. Maldonado, 413 A.2d at 1262.

Thus, the focus in this case is on the power to speak for the corporation as to whether the lawsuit should be continued or terminated. As we see it, this issue in the current appellate posture of this case has three aspects: the conclusions of the Court below concerning the continuing right of a stockholder to maintain a derivative action; the corporate power under Delaware law of an authorized board committee to cause dismissal of litigation instituted for the benefit of the corporation; and the role of the Court of Chancery in resolving conflicts between the stockholder and the committee.

Accordingly, we turn first to the Court of Chancery's conclusions concerning the right of a plaintiff stockholder in a derivative action. We find that its determination that a stockholder, once demand is made and refused, possesses an independent, individual right to continue a derivative suit for breaches of fiduciary duty over objection by the corporation, Maldonado, 413 A.2d at 1262-63, as an absolute rule, is erroneous. The Court of Chancery relied principally upon Sohland v. Baker, Del.Supr., 141 A. [783] 277 (1927), for this statement of the Delaware rule. Maldonado, 413 A.2d at 1260-61. Sohland is sound law. But Sohland cannot be fairly read as supporting the broad proposition which evolved in the opinion below.

In Sohland, the complaining stockholder was allowed to file the derivative action in equity after making demand and after the board refused to bring the lawsuit. But the question before us relates to the power of the corporation by motion to terminate a lawsuit properly commenced by a stockholder without prior demand. No Delaware statute or case cited to us directly determines this new question and we do not think that Sohland addresses it by implication.

The language in Sohland relied on by the Vice Chancellor negates the contention that the case stands for the broad rule of stockholder right which evolved below. This Court therein stated that "a stockholder may sue in his own name for the purpose of enforcing corporate rights ... in a proper case if the corporation on the demand of the stockholder refuses to bring suit." 141 A. at 281 (emphasis added). The Court also stated that "whether ["[t]he right of a stockholder to file a bill to litigate corporate rights"] exists necessarily depends on the facts of each particular case." 141 A. at 282 (emphasis added). Thus, the precise language only supports the stockholder's right to initiate the lawsuit. It does not support an absolute right to continue to control it.

Additionally, the issue and context in Sohland are simply different from this case. Baker, a stockholder, suing on behalf of Bankers' Mortgage Co., sought cancellation of stock issued to Sohland, a director of Bankers', in a transaction participated in by a "great majority" of Bankers' board. Before instituting his suit, Baker requested the board to assert the cause of action. The board refused. Interestingly, though, on the same day the board refused, it authorized payment of Baker's attorneys fees so that he could pursue the claim; one director actually escorted Baker to the attorneys suggested by the board. At this chronological point, Sohland had resigned from the board, and it was he, not the board, who was protesting Baker's ability to bring suit. In sum, despite the board's refusal to bring suit, it is clear that the board supported Baker in his efforts.^[8] It is not surprising then that he was allowed to proceed as the corporation's representative "for the prevention of injustice", because "the corporation itself refused to litigate an apparent corporate right." 141 A. at 282.

Moreover, McKee v. Rogers, Del.Ch., 156 A. 191 (1931), stated "as a general rule" that "a stockholder cannot be permitted... to invade the discretionary field committed to the judgment of the directors and sue in the corporation's behalf when the managing body refuses. This rule is a well settled one." 156 A. at 193.^[9]

The McKee rule, of course, should not be read so broadly that the board's refusal will be determinative in every instance. Board members, owing a well-established fiduciary duty to the corporation, will not be allowed to cause a derivative suit to be dismissed when it would be a breach of their fiduciary duty. Generally [784] disputes pertaining to control of the suit arise in two contexts.

Consistent with the purpose of requiring a demand, a board decision to cause a derivative suit to be dismissed as detrimental to the company, after demand has been made and refused, will be respected unless it was wrongful.^[10] See, e. g., United Copper Securities Co. v. Amalgamated Copper Co., 244 U.S. 261, 263-64, 37 S.Ct. 509, 510, 61 L.Ed. 1119, 1124 (1917); Stockholder Derivative Actions, supra note 5, 44 U.Chi. L.Rev. at 169, 191-92; Note, Demand on Directors and Shareholders as a Prerequisite to a Derivative Suit, 73 Har.L.Rev. 746, 748, 759 (1960); 13 W. Fletcher, Cyclopedia of the Law of Private Corporations § 5969 (rev.perm.ed. 1980). A claim of a wrongful decision not to sue is thus the first exception and the first context of dispute. Absent a wrongful refusal, the stockholder in such a situation simply lacks legal managerial power. Compare Maldonado, 413 A.2d at 1259-60.

But it cannot be implied that, absent a wrongful board refusal, a stockholder can never have an individual right to initiate an action. For, as is stated in McKee, a "well settled" exception exists to the general rule.

"[A] stockholder may sue in equity in his derivative right to assert a cause of action in behalf of the corporation, without prior demand upon the directors to sue, when it is apparent that a demand would be futile, that the officers are under an influence that sterilizes discretion and could not be proper persons to conduct the litigation."

156 A. at 193 (emphasis added). This exception, the second context for dispute, is consistent with the Court of Chancery's statement below, that "[t]he stockholders' individual right to bring the action does not ripen, however, ... unless he can show a demand to be futile." Maldonado, 413 A.2d at 1262.^[11]

These comments in McKee and in the opinion below make obvious sense. A demand, when required and refused (if not wrongful), terminates a stockholder's legal ability to initiate a derivative action.^[12] But where demand is properly excused, the stockholder does possess the ability to initiate the action on his corporation's behalf.

These conclusions, however, do not determine the question before us. Rather, they merely bring us to the question to be decided. It is here that we part company with the Court below. Derivative suits enforce corporate rights and any recovery obtained goes to the corporation. Taormina v. Taormina Corp., Del.Ch., 78 A.2d 473, 476 (1951); Keenan v. Eshleman, Del.Supr., 2 A.2d 904, 912-13 (1938). "The right of a stockholder to file a bill to litigate corporate rights is, therefore, solely for the purpose of preventing injustice where it is apparent that material corporate rights would not otherwise be protected." Sohland, 141 A. at 282. We see no inherent reason why the "two phases" of a derivative suit, the stockholder's suit to compel the corporation to sue and the corporation's suit (see 413 A.2d at 1261-62), should automatically result in the placement in the hands of the [785] litigating stockholder sole control of the corporate right throughout the litigation. To the contrary, it seems to us that such an inflexible rule would recognize the interest of one person or group to the exclusion of all others within the corporate entity. Thus, we reject the view of the Vice Chancellor as to the first aspect of the issue on appeal.

The question to be decided becomes: When, if at all, should an authorized board committee be permitted to cause litigation, properly initiated by a derivative stockholder in his own right, to be dismissed? As noted above, a board has the power to choose not to pursue litigation when demand is made upon it, so long as the decision is not wrongful. If the board determines that a suit would be detrimental to the company, the board's determination prevails. Even when demand is excusable, circumstances may arise when continuation of the litigation would not be in the corporation's best interests. Our inquiry is whether, under such circumstances, there is a permissible procedure under § 141(a) by which a corporation can rid itself of detrimental litigation. If there is not, a single stockholder in an extreme case might control the destiny of the entire corporation. This concern was bluntly expressed by the Ninth Circuit in Lewis v. Anderson, 9th Cir., 615 F.2d 778, 783 (1979), cert. denied, ___ U.S. ___, 101 S.Ct. 206, 66 L.Ed.2d 89 (1980): "To allow one shareholder to incapacitate an entire board of directors merely by leveling charges against them gives too much leverage to dissident shareholders." But, when examining the means, including the committee mechanism examined in this case, potentials for abuse must be recognized. This takes us to the second and third aspects of the issue on appeal.

Before we pass to equitable considerations as to the mechanism at issue here, it must be clear that an independent committee possesses the corporate power to seek the termination of a derivative suit. Section 141(c) allows a board to delegate all of its authority to a committee.^[13] Accordingly, a committee with properly delegated authority would have the power to move for dismissal or summary judgment if the entire board did.

Even though demand was not made in this case and the initial decision of whether to litigate was not placed before the board, Zapata's board, it seems to us, retained all of its corporate power concerning litigation decisions. If Maldonado had made demand on the board in this case, it could have refused to bring suit. Maldonado could then have asserted that the decision not to sue was wrongful and, if correct, would have been allowed to maintain the suit. The board, however, never would have lost its statutory managerial authority. The demand requirement itself evidences that the managerial power is retained [786] by the board. When a derivative plaintiff is allowed to bring suit after a wrongful refusal, the board's authority to choose whether to pursue the litigation is not challenged although its conclusion — reached through the exercise of that authority — is not respected since it is wrongful. Similarly, Rule 23.1, by excusing demand in certain instances, does not strip the board of its corporate power. It merely saves the plaintiff the expense and delay of making a futile demand resulting in a probable tainted exercise of that authority in a refusal by the board or in giving control of litigation to the opposing side. But the board entity remains empowered under § 141(a) to make decisions regarding corporate litigation. The problem is one of member disqualification, not the absence of power in the board.

The corporate power inquiry then focuses on whether the board, tainted by the self-interest of a majority of its members, can legally delegate its authority to a committee of two disinterested directors. We find our statute clearly requires an affirmative answer to this question. As has been noted, under an express provision of the statute, § 141(c), a committee can exercise all of the authority of the board to the extent provided in the resolution of the board. Moreover, at lest by analogy to our statutory section on interested directors, 8 Del.C. § 141, it seems clear that the Delaware statute is designed to permit disinterested directors to act for the board.^[14] Compare Puma v. Marriott, Del.Ch., 283 A.2d 693, 695-96 (1971).

We do not think that the interest taint of the board majority is per se a legal bar to the delegation of the board's power to an independent committee composed of disinterested board members. The committee can properly act for the corporation to move to dismiss derivative litigation that is believed to be detrimental to the corporation's best interest.

Our focus now switches to the Court of Chancery which is faced with a stockholder assertion that a derivative suit, properly instituted, should continue for the benefit of the corporation and a corporate assertion, properly made by a board committee acting with board authority, that the same derivative suit should be dismissed as inimical to the best interests of the corporation.

At the risk of stating the obvious, the problem is relatively simple. If, on the one hand, corporations can consistently wrest bona fide derivative actions away from well-meaning derivative plaintiffs through the use of the committee mechanism, the derivative suit will lose much, if not all, of its generally-recognized effectiveness as an intra-corporate means of policing boards of directors. See Dent, supra note 5, 75 Nw.U. L.Rev. at 96 & n. 3, 144 & n. 241. If, on the other hand, corporations are unable to rid themselves of meritless or harmful litigation [787] and strike suits, the derivative action, created to benefit the corporation, will produce the opposite, unintended result. For a discussion of strike suits, see Dent, supra, 75 Nw.U.L.Rev. at 137. See also Cramer v. General Telephone & Electronics Corp., 3d Cir., 582 F.2d 259, 275 (1978), cert. denied, 439 U.S. 1129, 99 S.Ct. 1048, 59 L.Ed.2d 90 (1979). It thus appears desirable to us to find a balancing point where bona fide stockholder power to bring corporate causes of action cannot be unfairly trampled on by the board of directors, but the corporation can rid itself of detrimental litigation.

As we noted, the question has been treated by other courts as one of the "business judgment" of the board committee. If a "committee, composed of independent and disinterested directors, conducted a proper review of the matters before it, considered a variety of factors and reached, in good faith, a business judgment that [the] action was not in the best interest of [the corporation]", the action must be dismissed. See, e. g., Maldonado v. Flynn, supra, 485 F.Supp. at 282, 286. The issues become solely independence, good faith, and reasonable investigation. The ultimate conclusion of the committee, under that view, is not subject to judicial review.

We are not satisfied, however, that acceptance of the "business judgment" rationale at this stage of derivative litigation is a proper balancing point. While we admit an analogy with a normal case respecting board judgment, it seems to us that there is sufficient risk in the realities of a situation like the one presented in this case to justify caution beyond adherence to the theory of business judgment.

The context here is a suit against directors where demand on the board is excused. We think some tribute must be paid to the fact that the lawsuit was properly initiated. It is not a board refusal case. Moreover, this complaint was filed in June of 1975 and, while the parties undoubtedly would take differing views on the degree of litigation activity, we have to be concerned about the creation of an "Independent Investigation Committee" four years later, after the election of two new outside directors. Situations could develop where such motions could be filed after years of vigorous litigation for reasons unconnected with the merits of the lawsuit.

Moreover, notwithstanding our conviction that Delaware law entrusts the corporate power to a properly authorized committee, we must be mindful that directors are passing judgment on fellow directors in the same corporation and fellow directors, in this instance, who designated them to serve both as directors and committee members. The question naturally arises whether a "there but for the grace of God go I" empathy might not play a role. And the further question arises whether inquiry as to independence, good faith and reasonable investigation is sufficient safeguard against abuse, perhaps subconscious abuse.

There is another line of exploration besides the factual context of this litigation which we find helpful. The nature of this motion finds no ready pigeonhole, as perhaps illustrated by its being set forth in the alternative. It is perhaps best considered as a hybrid summary judgment motion for dismissal because the stockholder plaintiff's standing to maintain the suit has been lost. But it does not fit neatly into a category described in Rule 12(b) of the Court of Chancery Rules nor does it correspond directly with Rule 56 since the question of genuine issues of fact on the merits of the stockholder's claim are not reached.

It seems to us that there are two other procedural analogies that are helpful in addition to reference to Rules 12 and 56. There is some analogy to a settlement in that there is a request to terminate litigation without a judicial determination of the merits. See Perrine v. Pennroad Corp., Del. Supr., 47 A.2d 479, 487 (1946). "In determining whether or not to approve a proposed settlement of a derivative stockholders' action [when directors are on both sides of the transaction], the Court of Chancery is called upon to exercise its own business judgment." Neponsit Investment Co. v. Abramson, Del.Supr., 405 A.2d 97, 100 (1979) and cases therein cited. In this case, [788] the litigating stockholder plaintiff facing dismissal of a lawsuit properly commenced ought, in our judgment, to have sufficient status for strict Court review.

Finally, if the committee is in effect given status to speak for the corporation as the plaintiff in interest, then it seems to us there is an analogy to Court of Chancery Rule 41(a)(2) where the plaintiff seeks a dismissal after an answer. Certainly, the position of record of the litigating stockholder is adverse to the position advocated by the corporation in the motion to dismiss. Accordingly, there is perhaps some wisdom to be gained by the direction in Rule 41(a)(2) that "an action shall not be dismissed at the plaintiff's instance save upon order of the Court and upon such terms and conditions as the Court deems proper."

Whether the Court of Chancery will be persuaded by the exercise of a committee power resulting in a summary motion for dismissal of a derivative action, where a demand has not been initially made, should rest, in our judgment, in the independent discretion of the Court of Chancery. We thus steer a middle course between those cases which yield to the independent business judgment of a board committee and this case as determined below which would yield to unbridled plaintiff stockholder control. In pursuit of the course, we recognize that "[t]he final substantive judgment whether a particular lawsuit should be maintained requires a balance of many factors — ethical, commercial, promotional, public relations, employee relations, fiscal as well as legal." Maldonado v. Flynn, supra, 485 F.Supp. at 285. But we are content that such factors are not "beyond the judicial reach" of the Court of Chancery which regularly and competently deals with fiduciary relationships, disposition of trust property, approval of settlements and scores of similar problems. We recognize the danger of judicial overreaching but the alternatives seem to us to be outweighed by the fresh view of a judicial outsider. Moreover, if we failed to balance all the interests involved, we would in the name of practicality and judicial economy foreclose a judicial decision on the merits. At this point, we are not convinced that is necessary or desirable.

After an objective and thorough investigation of a derivative suit, an independent committee may cause its corporation to file a pretrial motion to dismiss in the Court of Chancery. The basis of the motion is the best interests of the corporation, as determined by the committee. The motion should include a thorough written record of the investigation and its findings and recommendations. Under appropriate Court supervision, akin to proceedings on summary judgment, each side should have an opportunity to make a record on the motion. As to the limited issues presented by the motion noted below, the moving party should be prepared to meet the normal burden under Rule 56 that there is no genuine issue as to any material fact and that the moving party is entitled to dismiss as a matter of law.^[15] The Court should apply a two-step test to the motion.

First, the Court should inquire into the independence and good faith of the committee and the bases supporting its conclusions. Limited discovery may be ordered to facilitate such inquiries.^[16] The corporation should have the burden of proving independence, good faith and a reasonable investigation, rather than presuming independence, good faith and reasonableness.^[17] [789] If the Court determines either that the committee is not independent or has not shown reasonable bases for its conclusions, or, if the Court is not satisfied for other reasons relating to the process, including but not limited to the good faith of the committee, the Court shall deny the corporation's motion. If, however, the Court is satisfied under Rule 56 standards that the committee was independent and showed reasonable bases for good faith findings and recommendations, the Court may proceed, in its discretion, to the next step.

The second step provides, we believe, the essential key in striking the balance between legitimate corporate claims as expressed in a derivative stockholder suit and a corporation's best interests as expressed by an independent investigating committee. The Court should determine, applying its own independent business judgment, whether the motion should be granted.^[18] This means, of course, that instances could arise where a committee can establish its independence and sound bases for its good faith decisions and still have the corporation's motion denied. The second step is intended to thwart instances where corporate actions meet the criteria of step one, but the result does not appear to satisfy its spirit, or where corporate actions would simply prematurely terminate a stockholder grievance deserving of further consideration in the corporation's interest. The Court of Chancery of course must carefully consider and weigh how compelling the corporate interest in dismissal is when faced with a non-frivolous lawsuit. The Court of Chancery should, when appropriate, give special consideration to matters of law and public policy in addition to the corporation's best interests.

If the Court's independent business judgment is satisfied, the Court may proceed to grant the motion, subject, of course, to any equitable terms or conditions the Court finds necessary or desirable.

The interlocutory order of the Court of Chancery is reversed and the cause is remanded for further proceedings consistent with this opinion.

[*] The appeal was argued on Oct. 16, 1980 but certain procedural matters required by this Court were not accomplished until the date indicated.

[1] Court of Chancery Rule 23.1 states in part:

"The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and the reasons for his failure to obtain the action or for not making the effort."

[2] Maldonado v. Flynn, Del.Ch., 417 A.2d 378 (1980). Proceedings in the Trial Court are not automatically stayed during the pendency of an interlocutory appeal. Supreme Court Rule 42(d).

[3] The District Court for the Southern District of Texas, in Maher v. Zapata Corp., S.D.Tex., 490 F.Supp. 348 (1980), denied Zapata's motions to dismiss or for summary judgment in an opinion consistent with Maldonado.

[4] Abbey v. Control Data Corp., 8th Cir., 603 F.2d 724 (1979), cert. denied, 444 U.S. 1017, 100 S.Ct. 670, 62 L.Ed.2d 647 (1980); Lewis v. Adams, N.D.Okl., No. 77-266C (November 15, 1979); Siegal v. Merrick, S.D.N.Y., 84 F.R.D. 106 (1979); and, of course, Maldonado v. Flynn, S.D.N.Y., 485 F.Supp. 274 (1980). See also Abramowitz v. Posner, S.D.N.Y., 513 F.Supp. 120, (1981) which specifically rejected the result reached by the Vice Chancellor in this case.

[5] See Dent, The Power of Directors to Terminate Shareholder Litigation: The Death of the Derivative Suit? 75 Nw.U.L.Rev. 96, 98 & n. 14 (1980); Comment, The Demand and Standing Requirements in Stockholder Derivative Actions, 44 U.Chi.L.Rev. 168, 192 & nn. 153-54 (1976) (herein Stockholder Derivative Actions).

[6] 8 Del.C. § 141(a) states:

"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."

[7] See Arsht, The Business Judgment Rule Revisited, 8 Hofstra L.Rev. 93, 97, 130-33 (1979).

[8] Compare Baker v. Bankers' Mortgage Co., Del.Ch., 129 A. 775, 776-77 (1925), the lower Sohland. In Baker, Chancellor Wolcott posed a rhetorical question that is entirely consistent with the result we reach today: "[W]hy should not a stockholder, if the managing body absolutely refuses to act, be permitted to assert on behalf of himself and other stockholders a complaint, not against matters lying in sound discretion and honest judgment, but against frauds perpetrated by an officer in clear breach of his trust?" 129 A. at 777.

[9] To the extent that Mayer v. Adams, Del. Supr., 141 A.2d 458, 462 (1958) and Ainscow v. Sanitary Co. of America, Del.Ch., 180 A. 614, 615 (1935), relied upon in Maldonado, 413 A.2d at 1262, contain language relating to the rule in McKee, we note that each decision is dissimilar from the one we examine today. Mayer held that demand on the stockholders was not required before maintaining a derivative suit if the wrong alleged could not be ratified by the stockholders. Ainscow found defective a complaint that neither alleged demand on the directors, nor reasons why demand was excusable.

[10] In other words, when stockholders, after making demand and having their suit rejected, attack the board's decision as improper, the board's decision falls under the "business judgment" rule and will be respected if the requirements of the rule are met. See Dent, supra note 5, 75 Nw.U.L.Rev. at 100-01 & nn. 24-25. That situation should be distinguished from the instant case, where demand was not made, and the power of the board to seek a dismissal, due to disqualification, presents a threshold issue. For examples of what has been held to be a wrongful decision not to sue, see Stockholder Derivative Actions, supra note 5, 44 U.Chi.L. Rev. at 193-98. We recognize that the two contexts can overlap in practice.

[11] These statements are consistent with Rule 23.1's "reasons for ... failure" to make demand. See also the other cases cited by the Vice Chancellor, 413 A.2d at 1262: Ainscow v. Sanitary Co. of America, supra note 9, 180 A. at 615; Mayer v. Adams, supra note 9, 141 A.2d at 462; Dann v. Chrysler Corp., Del.Ch., 174 A.2d 696, 699-700 (1961).

[12] Even in this situation, it may take litigation to determine the stockholder's lack of power, i. e., standing.

[13] 8 Del.C. § 141(c) states:

"The board of directors may, by resolution passed by a majority of the whole board, designate 1 or more committees, each committee to consist of 1 or more of the directors of the corporation. The board may designate 1 or more directors as alternative members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The bylaws may provide that in the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution, bylaws, or certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock."

[14] 8 Del.C. § 144 states:

"§ 144. Interested directors; quorum.

(a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if:

(1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or

(2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or

(3) The contract or transaction is fair to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee, or the shareholders.

(b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction."

[15] We do not foreclose a discretionary trial of factual issues but that issue is not presented in this appeal. See Lewis v. Anderson, supra, 615 F.2d at 780. Nor do we foreclose the possibility that other motions may proceed or be joined with such a pretrial summary judgment motion to dismiss, e. g., a partial motion for summary judgment on the merits.

[16] See, e. g., Galef v. Alexander, 2d Cir., 615 F.2d 51, 56 (1980); Maldonado v. Flynn, supra, 485 F.Supp. at 285-86; Rosengarten v. International Telephone & Telegraph Corp., S.D.N.Y., 466 F.Supp. 817, 823 (1979); Gall v. Exxon Corp., S.D.N.Y., 418 F.Supp. 508, 520 (1976). Compare Dent, supra note 5, 75 Nw.U.L.Rev. at 131-33.

[17] Compare Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 928-29, 393 N.E.2d 994 (1979). Our approach here is analogous to and consistent with the Delaware approach to "interested director" transactions, where the directors, once the transaction is attacked, have the burden of establishing its "intrinsic fairness" to a court's careful scrutiny. See, e. g., Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107 (1952).

[18] This step shares some of the same spirit and philosophy of the statement by the Vice Chancellor: "Under our system of law, courts and not litigants should decide the merits of litigation." 413 A.2d at 1263.

[920] Robert D. Goldberg, Esquire, Biggs & Battaglia, Wilmington, Delaware; Lee D. Rudy, Esquire and Robert B. Weiser, Esquire, Schiffrin & Barroway, LLP, Bala Cynwyd, Pennsylvania; Samuel Rudman, Esquire and Douglas Wilens, Esquire, Cauley, Geller, Bowman & Rudman, LLP, Boca Raton, Florida, Attorneys for Plaintiffs.

Kenneth J. Nachbar, Esquire, Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware, Attorney for the Individual Defendants.

David C. McBride, Esquire, Adam W. Poff, Esquire, and Christian Douglas Wright, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware; George M. Newcombe, Esquire and James G. Kreissman, Esquire, Simpson Thacher & Bartlett, LLP, Palo Alto, California, Attorneys for Nominal Defendant Oracle Corporation.

OPINION

STRINE, Vice Chancellor.

In this opinion, I address the motion of the special litigation committee ("SLC") of Oracle Corporation to terminate this action, "the Delaware Derivative Action," and other such actions pending in the name of Oracle against certain Oracle directors and officers. These actions allege that these Oracle directors engaged in insider trading while in possession of material, non-public information showing that Oracle would not meet the earnings guidance it gave to the market for the third quarter of Oracle's fiscal year 2001. The SLC bears the burden of persuasion on this motion and must convince me that there is no material issue of fact calling into doubt its independence. This requirement is set forth in Zapata Corp. v. Maldonado^[1] and its progeny.^[2]

The question of independence "turns on whether a director is, for any substantial reason, incapable of making a decision with only the best interests of the corporation in mind."^[3] That is, the independence test ultimately "focus[es] on impartiality and objectivity."^[4] In this case, the SLC has failed to demonstrate that no material factual question exists regarding its independence.

During discovery, it emerged that the two SLC members — both of whom are professors at Stanford University — are being asked to investigate fellow Oracle directors who have important ties to Stanford, too. Among the directors who are accused by the derivative plaintiffs of insider trading are: (1) another Stanford professor, who taught one of the SLC members when the SLC member was a Ph.D. candidate and who serves as a senior fellow and a steering committee member alongside that SLC member at the Stanford Institute for Economic Policy Research or "SIEPR"; (2) a Stanford alumnus who has directed millions of dollars of contributions to Stanford during recent years, serves as Chair of SIEPR's Advisory Board and has a conference center named for him at SIEPR's facility, and has contributed nearly $600,000 to SIEPR and the Stanford Law School, both parts of Stanford with which one of the SLC members is closely affiliated; and (3) Oracle's CEO, who has made millions of dollars in donations to Stanford through a personal [921] foundation and large donations indirectly through Oracle, and who was considering making donations of his $100 million house and $170 million for a scholarship program as late as August 2001, at around the same time period the SLC members were added to the Oracle board. Taken together, these and other facts cause me to harbor a reasonable doubt about the impartiality of the SLC.

It is no easy task to decide whether to accuse a fellow director of insider trading. For Oracle to compound that difficulty by requiring SLC members to consider accusing a fellow professor and two large benefactors of their university of conduct that is rightly considered a violation of criminal law was unnecessary and inconsistent with the concept of independence recognized by our law. The possibility that these extraneous considerations biased the inquiry of the SLC is too substantial for this court to ignore. I therefore deny the SLC's motion to terminate.

I. Factual Background

A. Summary of the Plaintiffs' Allegations

The Delaware Derivative Complaint centers on alleged insider trading by four members of Oracle's board of directors — Lawrence Ellison, Jeffrey Henley, Donald Lucas, and Michael Boskin (collectively, the "Trading Defendants"). Each of the Trading Defendants had a very different role at Oracle.

Ellison is Oracle's Chairman, Chief Executive Officer, and its largest stockholder, owning nearly twenty-five percent of Oracle's voting shares. By virtue of his ownership position, Ellison is one of the wealthiest men in America. By virtue of his managerial position, Ellison has regular access to a great deal of information about how Oracle is performing on a week-to-week basis.

Henley is Oracle's Chief Financial Officer, Executive Vice President, and a director of the corporation. Like Ellison, Henley has his finger on the pulse of Oracle's performance constantly.

Lucas is a director who chairs Oracle's Executive Committee and its Finance and Audit Committee. Although the plaintiffs allege that Lucas's positions gave him access to material, non-public information about the company, they do so cursorily. On the present record, it appears that Lucas did not receive copies of week-to-week projections or reports of actual results for the quarter to date. Rather, his committees primarily received historical financial data.

Boskin is a director, Chairman of the Compensation Committee, and a member of the Finance and Audit Committee. As with Lucas, Boskin's access to information was limited mostly to historical financials and did not include the week-to-week internal projections and revenue results that Ellison and Henley received.

According to the plaintiffs, each of these Trading Defendants possessed material, non-public information demonstrating that Oracle would fail to meet the earnings and revenue guidance it had provided to the market in December 2000. In that guidance, Henley projected—subject to many disclaimers, including the possibility that a softening economy would hamper Oracle's ability to achieve these results — that Oracle would earn 12 cents per share and generate revenues of over $2.9 billion in the third quarter of its fiscal year 2001 ("3Q FY 2001"). Oracle's 3Q FY 2001 ran from December 1, 2000 to February 28, 2001.

The plaintiffs allege that this guidance was materially misleading and became even more so as early results for the quarter came in. To start with, the plaintiffs assert that the guidance rested on an untenably [922] rosy estimate of the performance of an important new Oracle product, its "Suite 1li" systems integration product that was designed to enable a business to run all of its information systems using a complete, integrated package of software with financial, manufacturing, sales, logistics, and other applications features that were "inter-operable." The reality, the plaintiffs contend, was that Suite 11i was riddled with bugs and not ready for prime time. As a result, Suite 11i was not in a position to make a material contribution to earnings growth.

In addition, the plaintiffs contend more generally that the Trading Defendants received material, non-public information that the sales growth for Oracle's other products was slowing in a significant way, which made the attainment of the earnings and revenue guidance extremely difficult. This information grew in depth as the quarter proceeded, as various sources of information that Oracle's top managers relied upon allegedly began to signal weakness in the company's revenues. These signals supposedly included a slowdown in the "pipeline" of large deals that Oracle hoped to close during the quarter and weak revenue growth in the first month of the quarter.

During the time when these disturbing signals were allegedly being sent, the Trading Defendants engaged in the following trades:

• On January 3, 2001, Lucas sold 150,000 shares of Oracle common stock at $30 per share, reaping proceeds of over $4.6 million. These sales constituted 17% of Lucas's Oracle holdings.

• On January 4, 2001, Henley sold one million shares of Oracle stock at approximately $32 per share, yielding over $32.3 million. These sales represented 7% of Henley's Oracle holdings.

• On January 17, 2001, Boskin sold 150,000 shares of Oracle stock at over $33 per share, generating in excess of $5 million. These sales were 16% of Boskin's Oracle holdings.

• From January 22 to January 31, 2001, Ellison sold over 29 million shares at prices above $30 per share, producing over $894 million. Despite the huge proceeds generated by these sales, they constituted the sale of only 2% of Ellison's Oracle holdings.

Into early to mid-February, Oracle allegedly continued to assure the market that it would meet its December guidance. Then, on March 1, 2001, the company announced that rather than posting 12 cents per share in quarterly earnings and 25% license revenue growth as projected, the company's earnings for the quarter would be 10 cents per share and license revenue growth only 6%. The stock market reacted swiftly and negatively to this news, with Oracle's share price dropping as low as $15.75 before closing at $16.88 — a 21% decline in one day. These prices were well below the above $30 per share prices at which the Trading Defendants sold in January 2001.

Oracle, through Ellison and Henley, attributed the adverse results to a general weakening in the economy, which led Oracle's customers to cut back sharply on purchases. Because (the company claimed) most of its sales close in the late days of quarters, the company did not become aware that it would miss its projections until shortly before the quarter closed. The reasons given by Ellison and Henley subjected them to sarcastic rejoinders from analysts, who noted that they had only recently suggested that Oracle was better-positioned than other companies to continue to deliver growth in a weakening economy.

B. The Plaintiffs' Claims in the Delaware Derivative Action

The plaintiffs make two central claims in their amended complaint in the Delaware [923] Derivative Action. First, the plaintiffs allege that the Trading Defendants breached their duty of loyalty by misappropriating inside information and using it as the basis for trading decisions. This claim rests its legal basis on the venerable case of Brophy v. Cities Service Co.^[5] Its factual foundation is that the Trading Defendants were aware (or at least possessed information that should have made them aware) that the company would miss its December guidance by a wide margin and used that information to their advantage in selling at artificially inflated prices.

Second, as to the other defendants — who are the members of the Oracle board who did not trade — the plaintiffs allege a Caremark^[6] violation, in the sense that the board's indifference to the deviation between the company's December guidance and reality was so extreme as to constitute subjective bad faith.

C. The Various Litigations

Oracle's failure to meet its earnings and revenue guidance, and the sales by the Trading Defendants, inevitably generated a spate of lawsuits. Several derivative actions were filed in the state and federal courts of California. Those actions are, in substance, identical to the Delaware Derivative Action. Those suits have now all been stayed in deference to the SLC's investigation and the court's ruling on this motion.

Federal class actions were also filed, and the consolidated complaint in those actions formed the basis for much of the amended complaint in the Delaware Derivative Action. By now, the "Federal Class Action" has been dismissed for failure to state a claim upon which relief can be granted for the third time; this time the order addressing the second amended complaint dismissed the Federal Class Action with prejudice.^[7]

D. The Formation of the Special Litigation Committee

On February 1, 2002, Oracle formed the SLC in order to investigate the Delaware Derivative Action and to determine whether Oracle should press the claims raised by the plaintiffs, settle the case, or terminate it. Soon after its formation, the SLC's charge was broadened to give it the same mandate as to all the pending derivative actions, wherever they were filed.

The SLC was granted full authority to decide these matters without the need for approval by the other members of the Oracle board.

E. The Members of the Special Litigation Committee

Two Oracle board members were named to the SLC. Both of them joined the Oracle board on October 15, 2001, more than a half a year after Oracle's 3Q FY 2001 closed. The SLC members also share something else: both are tenured professors at Stanford University.

Professor Hector Garcia-Molina is Chairman of the Computer Science Department at Stanford and holds the Leonard Bosack and Sandra Lerner Professorship in the Computer Science and Electrical Engineering Departments at Stanford. A renowned expert in his field, Garcia-Molina was a professor at Princeton before coming to Stanford in 1992. Garcia-Molina's appointment at Stanford represented a homecoming of some sort, because he obtained both his undergraduate and graduate degrees from Stanford.

[924] The other SLC member, Professor Joseph Grundfest, is the W.A. Franke Professor of Law and Business at Stanford University. He directs the University's well-known Directors' College^[8] and the Roberts Program in Law, Business, and Corporate Governance at the Stanford Law School. Grundfest is also the principal investigator for the Law School's Securities Litigation Clearinghouse. Immediately before coming to Stanford, Grundfest served for five years as a Commissioner of the Securities and Exchange Commission. Like Garcia-Molina, Grundfest's appointment at Stanford was a homecoming, because he obtained his law degree and performed significant post-graduate work in economics at Stanford.

As will be discussed more specifically later, Grundfest also serves as a steering committee member and a senior fellow of the Stanford Institute for Economic Policy Research, and releases working papers under the "SIEPR" banner.

For their services, the SLC members were paid $250 an hour, a rate below that which they could command for other activities, such as consulting or expert witness testimony. Nonetheless, during the course of their work, the SLC members became concerned that (arguably scandal-driven) developments in the evolving area of corporate governance as well as the decision in Telxon v. Meyerson,^[9] might render the amount of their compensation so high as to be an argument against their independence. Therefore, Garcia-Molina and Grundfest agreed to give up any SLC-related compensation if their compensation was deemed by this court to impair their impartiality.

F. The SLC Members Are Recruited to the Board

The SLC members were recruited to the board primarily by defendant Lucas, with help from defendant Boskin.^[10] The wooing of them began in the summer of 2001. Before deciding to join the Oracle board, Grundfest, in particular, did a good deal of due diligence. His review included reading publicly available information, among other things, the then-current complaint in the Federal Class Action.

Grundfest then met with defendants Ellison and Henley, among others, and asked them some questions about the Federal Class Action. The claims in the Federal Class Action are predicated on facts that are substantively identical to those on which the claims in the Delaware Derivative Action are based. Grundfest received answers that were consistent enough with what he called the "exogenous" information about the case to form sufficient confidence to at least join the Oracle board. Grundfest testified that this did not mean that he had concluded that the claims in the Federal Class Action had no merit, only that Ellison's and Henley's explanations of their conduct were plausible. Grundfest did, however, conclude that these were reputable businessmen with whom he felt comfortable serving as a fellow director, and that Henley had given very impressive answers to difficult questions regarding the way Oracle conducted its financial reporting operations.^[11]

[925] G. The SLC's Advisors

The most important advisors retained by the SLC were its counsel from Simpson Thacher & Bartlett LLP. Simpson Thacher had not performed material amounts of legal work for Oracle^[12] or any of the individual defendants before its engagement, and the plaintiffs have not challenged its independence.

National Economic Research Advisors ("NERA") was retained by the SLC to perform some analytical work. The plaintiffs have not challenged NERA's independence.

H. The SLC's Investigation and Report

The SLC's investigation was, by any objective measure, extensive. The SLC reviewed an enormous amount of paper and electronic records. SLC counsel interviewed seventy witnesses, some of them twice. SLC members participated in several key interviews, including the interviews of the Trading Defendants.

Importantly, the interviewees included all the senior members of Oracle's management most involved in its projection and monitoring of the company's financial performance, including its sales and revenue growth. These interviews combined with a special focus on the documents at the company bearing on these subjects, including e-mail communications.

The SLC also asked the plaintiffs in the various actions to identify witnesses the Committee should interview. The Federal Class Action plaintiffs identified ten such persons and the Committee interviewed all but one, who refused to cooperate. The Delaware Derivative Action plaintiffs and the other derivative plaintiffs declined to provide the SLC with any witness list or to meet with the SLC.

During the course of the investigation, the SLC met with its counsel thirty-five times for a total of eighty hours. In addition to that, the SLC members, particularly Professor Grundfest, devoted many more hours to the investigation.

In the end, the SLC produced an extremely lengthy Report totaling 1,110 pages (excluding appendices and exhibits) that concluded that Oracle should not pursue the plaintiffs' claims against the Trading Defendants or any of the other Oracle directors serving during the 3Q FY 2001. The bulk of the Report defies easy summarization. I endeavor a rough attempt to capture the essence of the Report in understandable terms, surfacing some implicit premises that I understand to have undergirded [926] the SLC's conclusions. Here goes.

Having absorbed a huge amount of material regarding Oracle's financial condition during the relevant period, the flow of information to top Oracle executives, Oracle's business and its products, and the general condition of the market at that time, the SLC concluded that even a hypothetical Oracle executive who possessed all information regarding the company's performance in December and January of 3Q FY 2001 would not have possessed material, non-public information that the company would fail to meet the earnings and revenue guidance it provided the market in December. Although there were hints of potential weakness in Oracle's revenue growth, especially starting in mid-January 2001, there was no reliable information indicating that the company would fall short of the mark, and certainly not to the extent that it eventually did.

Notably, none of the many e-mails from various Oracle top executives in January 2001 regarding the quarter anticipated that the company would perform as it actually did. Although some of these e-mails noted weakening, all are generally consistent with the proposition that Oracle executives expected to achieve the guidance. At strongest, they (in the SLC's view) can be read as indicating some doubts and the possibility that the company would fall short of the mark by a small margin, rather than the large one that ultimately resulted. Furthermore, the SLC found that the plaintiffs' allegations regarding the problems with Suite 11i were overstated and that the market had been adequately apprised of the state of that product's performance. And, as of that quarter, most of Oracle's competitors were still meeting analysts' expectations, suggesting that Oracle's assumption that general economic weakening would not stymie its ability to increase revenues in 3Q FY 2001 was not an unreasonable one.

Important to this conclusion is the SLC's finding that Oracle's quarterly earnings are subject to a so-called "hockey stick effect," whereby a large portion of each quarter's earnings comes in right at the end of the quarter. In 3Q FY 2001, the late influx of revenues that had often characterized Oracle's performance during its emergence as one of the companies with the largest market capitalization in the nation did not materialize; indeed, a large amount of product was waiting in Oracle warehouses for shipment for deals that Oracle had anticipated closing but did not close during the quarter.

Thus, taking into account all the relevant information sources, the SLC concluded that even Ellison and Henley — who were obviously the two Trading Defendants with the most access to inside information — did not possess material, nonpublic information. As to Lucas and Boskin, the SLC noted that they did not receive the weekly updates (of various kinds) that allegedly showed a weakening in Oracle's performance during 3Q FY 2001. As a result, there was even less of a basis to infer wrongdoing on their part.^[13]

In this same regard, the Report also noted that Oracle insiders felt especially confident about meeting 3Q FY 2001 guidance because the company closed a large transaction involving Covisint in December — a transaction that produced revenue giving the company a boost in meeting its guidance. Although the plaintiffs in this case argue that the Covisint transaction [927] was a unique deal that had its origins in earlier quarters when the economy was stronger and that masked a weakening in Oracle's then-current performance, the reality is that that the transaction was a real one of economic substance and that the revenue was properly accounted for in 3Q FY 2001. Combined with other indications that Oracle was on track to meet its guidance, the SLC concluded that the Covisint transaction supported their conclusion that the Trading Defendants did not possess material, non-public information contradicting the company's previous guidance.^[14]

Moreover, as the SLC Report points out, the idea that the Trading Defendants acted with scienter in trading in January 2001 was problematic in light of several factors. Implicitly the first and foremost is the reality that Oracle is a functioning business with real products of value. Although it is plausible to imagine a scenario where someone of Ellison's wealth would cash out, fearing the imminent collapse of a house of cards he had sold to an unsuspecting market, this is not the situation that Ellison faced in January 2001.

As of that time, Oracle faced no collapse, even if it, like other companies, had to deal with a slowing economy. And, as the SLC points out, Ellison sold only two percent of his holdings. A good deal of these sales were related to options that he had held for over nine years and that had to be exercised by August 2001.^[15] In view of Oracle's basic health, Ellison's huge wealth, and his retention of ninety-eight percent of his shares, the SLC concluded that any inference that Ellison acted with scienter and attempted to reap improper trading profits was untenable.

The same reasoning also motivated the SLC's conclusions as to Henley, who sold only seven percent of his stake in Oracle. Both Ellison and Henley stood to expose a great deal of their personal wealth to substantial risk by undertaking a scheme to cash out a small portion of their holdings and risking a greater injury to Oracle, a company in which they retained a far greater stake than they had sold. As important, these executives stood to risk their own personal reputations despite the absence of any personal cash crunch that impelled them to engage in risky, unethical, and illegal behavior.^[16]

Although Lucas and Boskin sold somewhat larger proportions of their Oracle holdings — sixteen percent and seventeen percent respectively — these proportions, the SLC concluded, were of the kind that federal courts had found lacking in suspicion. As with Ellison and Henley, the SLC identified no urgent need on either's part to generate cash by trading (illegally) on non-public, material information.

Of course, the amount of the proceeds each of the Trading Defendants generated was extremely large. By selling only two percent of his holdings, Ellison generated nearly a billion dollars, enough to flee to a [928] small island nation with no extradition laws and to live like a Saudi prince. But given Oracle's fundamental health as a company and his retention of ninety-eight percent of his shares, Ellison (the SLC found) had no need to take desperate — or, for that matter, even slightly risky — measures. The same goes for the other Trading Defendants; there was simply nothing special or urgent about their financial circumstances in January 2001 that would have motivated (or did motivate, in the SLC's view) the Trading Defendants to cash out because they believed that Oracle would miss its earnings guidance. And, of course, the SLC found that none of them possessed information that indicated that Oracle would, in fact, miss its mark for 3Q FY 2001.

For these and other reasons, the SLC concluded that the plaintiffs' allegations that the Trading Defendants had breached their fiduciary duty of loyalty by using inside information about Oracle to reap illicit trading gains were without merit. The SLC also determined that, consistent with this determination, there was no reason to sue the other members of the Oracle board who were in office as of 3Q FY 2001. Therefore, the SLC determined to seek dismissal of the Delaware Derivative Action and the other derivative actions.

II. The SLC Moves to Terminate

Consistent with its Report, the SLC moved to terminate this litigation. The plaintiffs were granted discovery focusing on three primary topics: the independence of the SLC, the good faith of its investigative efforts, and the reasonableness of the bases for its conclusion that the lawsuit should be terminated. Additionally, the plaintiffs received a large volume of documents comprising the materials that the SLC relied upon in preparing its Report.

III. The Applicable Procedural Standard

In order to prevail on its motion to terminate the Delaware Derivative Action, the SLC must persuade me that: (1) its members were independent; (2) that they acted in good faith; and (3) that they had reasonable bases for their recommendations.^[17] If the SLC meets that burden, I am free to grant its motion or may, in my discretion, undertake my own examination of whether Oracle should terminate and permit the suit to proceed if I, in my oxymoronic judicial "business judgment," conclude that procession is in the best interests of the company.^[18] This two-step analysis comes, of course, from Zapata.

In that case, the Delaware Supreme Court also instructed this court to apply a procedural standard akin to a summary judgment inquiry when ruling on a special litigation committee's motion to terminate. In other words, the Oracle SLC here "should be prepared to meet the normal burden under Rule 56 that there is no genuine issue as to any material fact and that [it] is entitled to dismiss as a matter of law."^[19] Candidly, this articulation of a special litigation committee's burden is an odd one, insofar as it applies a procedural standard designed for a particular purpose — the substantive dismissal of a case — with a standard centered on the determination of when a corporate committee's business decision about claims belonging to the corporation should be accepted by the court.

As I understand it, this standard requires me to determine whether, on the [929] basis of the undisputed factual record, I am convinced that the SLC was independent, acted in good faith, and had a reasonable basis for its recommendation. If there is a material factual question about these issues causing doubt about any of these grounds, I read Zapata and its progeny as requiring a denial of the SLC's motion to terminate.^[20]

In this case, the plaintiffs principally challenge the SLC's independence and the reasonableness of its recommendation. For reasons I next explain, I need examine only the more difficult question, which relates to the SLC's independence.

IV. Is the SLC Independent?

A. The Facts Disclosed in the Report

In its Report, the SLC took the position that its members were independent. In support of that position, the Report noted several factors including:

• the fact that neither Grundfest nor Garcia-Molina received compensation from Oracle other than as directors;

• the fact that neither Grundfest nor Garcia-Molina were on the Oracle board at the time of the alleged wrongdoing;

• the fact that both Grundfest and Garcia-Molina were willing to return their compensation as SLC members if necessary to preserve their status as independent;

• the absence of any other material ties between Oracle, the Trading Defendants, and any of the other defendants, on the one hand, and Grundfest and Garcia-Molina, on the other; and

• the absence of any material ties between Oracle, the Trading Defendants, and any of the other defendants, on the one hand, and the SLC's advisors, on the other.

Noticeably absent from the SLC Report was any disclosure of several significant ties between Oracle or the Trading Defendants and Stanford University, the university that employs both members of the SLC. In the Report, it was only disclosed that:

• defendant Boskin was a Stanford professor;

• the SLC members were aware that Lucas had made certain donations to Stanford; and

• among the contributions was a donation of $50,000 worth of stock that Lucas donated to Stanford Law School after Grundfest delivered a speech to a venture capital fund meeting in response to Lucas's request. It happens that Lucas's son is a partner in the fund and that approximately half the donation was allocated for use by Grundfest in his personal research.

B. The "Stanford" Facts that Emerged During Discovery

In view of the modesty of these disclosed ties, it was with some shock that a series of other ties among Stanford, Oracle, and the Trading Defendants emerged during discovery. Although the plaintiffs have embellished these ties considerably [930] beyond what is reasonable, the plain facts are a striking departure from the picture presented in the Report.

Before discussing these facts, I begin with certain features of the record — as I read it — that are favorable to the SLC. Initially, I am satisfied that neither of the SLC members is compromised by a fear that support for the procession of this suit would endanger his ability to make a nice living. Both of the SLC members are distinguished in their fields and highly respected. Both have tenure, which could not have been stripped from them for making a determination that this lawsuit should proceed.

Nor have the plaintiffs developed evidence that either Grundfest or Garcia-Molina have fundraising responsibilities at Stanford. Although Garcia-Molina is a department chairman, the record is devoid of any indication that he is required to generate contributions. And even though Grundfest heads up Stanford's Directors' College, the plaintiffs have not argued that he has a fundraising role in that regard. For this reason, it is important to acknowledge up front that the SLC members occupy positions within the Stanford community different from that of the University's President, deans, and development professionals, all of whom, it can be reasonably assumed, are required to engage heavily in the pursuit of contributions to the University.

This is an important point of departure for discussing the multitude of ties that have emerged among the Trading Defendants, Oracle, and Stanford during discovery in this case. In evaluating these ties, the court is not faced with the relatively easier call of considering whether these ties would call into question the impartiality of an SLC member who was a key fundraiser at Stanford^[21] or who was an untenured faculty member subject to removal without cause. Instead, one must acknowledge that the question is whether the ties I am about to identify would be of a material concern to two distinguished, tenured faculty members whose current jobs would not be threatened by whatever good faith decision they made as SLC members.

With this question in mind, I begin to discuss the specific ties that allegedly compromise the SLC's independence, beginning with those involving Professor Boskin.

1. Boskin

Defendant Michael J. Boskin is the T.M. Friedman Professor of Economics at Stanford University. During the Administration of President George H.W. Bush, Boskin occupied the coveted and important position of Chairman of the President's Council of Economic Advisors. He returned to Stanford after this government [931] service, continuing a teaching career there that had begun many years earlier.

During the 1970s, Boskin taught Grundfest when Grundfest was a Ph.D. candidate. Although Boskin was not Grundfest's advisor and although they do not socialize, the two have remained in contact over the years, speaking occasionally about matters of public policy.

Furthermore, both Boskin and Grundfest are senior fellows and steering committee members at the Stanford Institute for Economic Policy Research, which was previously defined as "SIEPR." According to the SLC, the title of senior fellow is largely an honorary one. According to SIEPR's own web site, however, "[s]enior fellows actively participate in SIEPR research and participate in its governance."^[22]

Likewise, the SLC contends that Grundfest went MIA as a steering committee member, having failed to attend a meeting since 1997. The SIEPR web site, however, identifies its steering committee as having the role of "advising the director [of SIEPR] and guiding [SIEPR] on matters pertaining to research and academics."^[23] Because Grundfest allegedly did not attend to these duties, his service alongside Boskin in that capacity is, the SLC contends, not relevant to his independence.

That said, the SLC does not deny that both Boskin and Grundfest publish working papers under the SIEPR rubric and that SIEPR helps to publicize their respective works. Indeed, as I will note later in this opinion, Grundfest, in the same month the SLC was formed, addressed a meeting of some of SIEPR's largest benefactors — the so-called "SIEPR Associates." The SLC just claims that the SIEPR affiliation is one in which SIEPR basks in the glow of Boskin and Grundfest, not the other way around, and that the mutual service of the two as senior fellows and steering committee members is not a collegial tie of any significance.

With these facts in mind, I now set forth the ties that defendant Lucas has to Stanford.

2. Lucas

As noted in the SLC Report, the SLC members admitted knowing that Lucas was a contributor to Stanford. They also acknowledged that he had donated $50,000 to Stanford Law School in appreciation for Grundfest having given a speech at his request. About half of the proceeds were allocated for use by Grundfest in his research.

But Lucas's ties with Stanford are far, far richer than the SLC Report lets on. To begin, Lucas is a Stanford alumnus, having obtained both his undergraduate and graduate degrees there. By any measure, he has been a very loyal alumnus.

In showing that this is so, I start with a matter of some jousting between the SLC and the plaintiffs. Lucas's brother, Richard, died of cancer and by way of his will established a foundation. Lucas became Chairman of the Foundation and serves as a director along with his son, a couple of other family members, and some non-family members. A principal object of the Foundation's beneficence has been Stanford. The Richard M. Lucas Foundation has given $11.7 million to Stanford since its 1981 founding. Among its notable contributions, the Foundation funded the establishment of the Richard M. Lucas Center [932] for Magnetic Resonance Spectroscopy and Imaging at Stanford's Medical School. Donald Lucas was a founding member and lead director of the Center.

The SLC Report did not mention the Richard M. Lucas Foundation or its grants to Stanford. In its briefs on this motion, the SLC has pointed out that Donald Lucas is one of nine directors at the Foundation and does not serve on its Grant Review Committee. Nonetheless, the SLC does not deny that Lucas is Chairman of the board of the Foundation and that the board approves all grants.

Lucas's connections with Stanford as a contributor go beyond the Foundation, however. From his own personal funds, Lucas has contributed $4.1 million to Stanford, a substantial percentage of which has been donated within the last half-decade. Notably, Lucas has, among other things, donated $424,000 to SIEPR and approximately $149,000 to Stanford Law School. Indeed, Lucas is not only a major contributor to SIEPR, he is the Chair of its Advisory Board. At SIEPR's facility at Stanford, the conference center is named the Donald L. Lucas Conference Center.

From these undisputed facts, it is inarguable that Lucas is a very important alumnus of Stanford and a generous contributor to not one, but two, parts of Stanford important to Grundfest: the Law School and SIEPR.

With these facts in mind, it remains to enrich the factual stew further, by considering defendant Ellison's ties to Stanford.

3. Ellison

There can be little doubt that Ellison is a major figure in the community in which Stanford is located. The so-called Silicon Valley has generated many success stories, among the greatest of which is that of Oracle and its leader, Ellison. One of the wealthiest men in America, Ellison is a major figure in the nation's increasingly important information technology industry. Given his wealth, Ellison is also in a position to make — and, in fact, he has made — major charitable contributions.

Some of the largest of these contributions have been made through the Ellison Medical Foundation, which makes grants to universities and laboratories to support biomedical research relating to aging and infectious diseases. Ellison is the sole director of the Foundation. Although he does not serve on the Foundation's Scientific Advisory Board that sifts through grant applications, he has reserved the right — as the Foundation's sole director — to veto any grants, a power he has not yet used but which he felt it important to retain. The Scientific Advisory Board is comprised of distinguished physicians and scientists from many institutions, but not including Stanford.

Although it is not represented on the Scientific Advisory Board, Stanford has nonetheless been the beneficiary of grants from the Ellison Medical Foundation — to the tune of nearly $10 million in paid or pledged funds. Although the Executive Director of the Foundation asserts by way of an affidavit that the grants are awarded to specific researchers and may be taken to another institution if the researcher leaves,^[24] the grants are conveyed under contracts between the Foundation and Stanford itself and purport by their terms to give Stanford the right (subject to Foundation approval) to select a substitute principal investigator if the original one becomes unavailable.^[25]

[933] During the time Ellison has been CEO of Oracle, the company itself has also made over $300,000 in donations to Stanford. Not only that, when Oracle established a generously endowed educational foundation — the Oracle Help Us Help Foundation — to help further the deployment of educational technology in schools serving disadvantaged populations, it named Stanford as the "appointing authority," which gave Stanford the right to name four of the Foundation's seven directors.^[26] Stanford's acceptance reflects the obvious synergistic benefits that might flow to, for example, its School of Education from the University's involvement in such a foundation, as well as the possibility that its help with the Foundation might redound to the University's benefit when it came time for Oracle to consider making further donations to institutions of higher learning.

Taken together, these facts suggest that Ellison (when considered as an individual and as the key executive and major stockholder of Oracle) had, at the very least, been involved in several endeavors of value to Stanford.

Beginning in the year 2000 and continuing well into 2001 — the same year that Ellison made the trades the plaintiffs contend were suspicious and the same year the SLC members were asked to join the Oracle board — Ellison and Stanford discussed a much more lucrative donation. The idea Stanford proposed for discussion was the creation of an Ellison Scholars Program modeled on the Rhodes Scholarship at Oxford. The proposed budget for Stanford's answer to Oxford: $170 million. The Ellison Scholars were to be drawn from around the world and were to come to Stanford to take a two-year interdisciplinary graduate program in economics, political science, and computer technology. During the summer between the two academic years, participants would work in internships at, among other companies, Oracle.

The omnipresent SIEPR was at the center of this proposal, which was put together by John Shoven, the Director of SIEPR. Ellison had serious discussions and contact with SIEPR around the time Shoven's proposal first surfaced.^[27] Indeed, in February 2001, Ellison delivered a speech at SIEPR — at which he was introduced by defendant Lucas. In a CD-ROM that contains images from the speech, Shoven's voice-over touts SIEPR's connections with "some of the most powerful and prominent business leaders."^[28]

As part of his proposal for the Ellison Scholars Program, Shoven suggested that three of the four Trading Defendants — Ellison, Lucas, and Boskin — be on the Program board. In the hypothetical curriculum that Shoven presented to Ellison, he included a course entitled "Legal Institutions and the Modern Economy" to be taught by Grundfest. Importantly, the Shoven proposal included a disclaimer indicating that listed faculty members may not have been consulted, and Grundfest denies that he was. The circumstances as a whole make that denial credible, although there is one confounding factor.

[934] Lucas, who was active in encouraging Ellison to form a program of this kind at Stanford, testified at his deposition that he had spoken to Grundfest about the proposed Ellison Scholars Program "a number of years ago,"^[29] Lucas seems to recall having asked Grundfest if he would be involved with the yet-to-be created Program, but his memory was, at best, hazy. At his own deposition, Grundfest was confronted more generically with whether he had heard of the Program and had agreed to teach in it if it was created, but not with whether he had discussed the topic with Lucas.^[30]

Candidly, this sort of discrepancy is not easy to reconcile on a paper record. My conclusion, however, is that Grundfest is being truthful in stating that he had not participated in shaping the Shoven proposal, had not agreed to teach in the Program, and could not recall participating in any discussions about the Program.

That said, I am not confident that Grundfest was entirely unaware, in 2001 and/or 2002 of the possibility of such a program or that he did not have a brief conversation with Lucas about it before joining the Oracle board. Nor am I convinced that the discussions about the Ellison Scholars Program were not of a very serious nature, indeed, the record evidence persuades me that they were serious. To find otherwise would be to conclude that Ellison is a man of more than ordinary whimsy, who says noteworthy things without caring whether they are true.

I say that because Ellison spoke to two of the nation's leading news outlets about the possibility of creating the Ellison Scholars Program. According to the Wall Street Journal, Ellison was considering the possibility of donating $150 million to either Harvard or Stanford for the purpose of creating an interdisciplinary (political science, economics, and technology) academic program.^[31] And, according to Fortune, Ellison said in an interview with Fortune correspondent Brent Schlender: "[O]ne of the other philanthropic things I'm doing is talking to Harvard and Stanford and MIT about creating a research program that looks at how technology impacts [sic] economics, and in turn how economics impacts the way we govern ourselves."^[32] It is significant that the latter article was published in mid-August 2001 — around the same time that the SLC members were considering whether to join the Oracle board and within a calendar year of the formation of the SLC itself. Importantly, these public statements supplement other private communications by Stanford officials treating the Ellison Scholars Program as an idea under serious consideration by Ellison.

Ultimately, it appears that Ellison decided to abandon the idea of making a major donation on the Rhodes Scholarship model to Stanford or any other institution. At least, that is what he now says by affidavit. According to Shoven of SIEPR, the Ellison Scholars Program idea is going nowhere now, and all talks with Ellison have ceased on that front.

Given the nature of this case, it is natural that there must be yet another curious [935] fact to add to the mix. This is that Ellison told the Washington Post in an October 30, 2000 article that he intended to leave his Woodside, California home — which is worth over $100 million — to Stanford upon his death.^[33] In an affidavit, Ellison does not deny making this rather splashy public statement. But, he now (again, rather conveniently) says that he has changed his testamentary intent. Ellison denies having "bequeathed, donated or otherwise conveyed the Woodside property (or any other real property that I own) to Stanford University."^[34] And, in the same affidavit, Ellison states unequivocally that he has no intention of ever giving his Woodside compound (or any other real property) to Stanford.^[35] Shortly before his deposition in this case, Grundfest asked Ellison about the Woodside property and certain news reports to the effect that he was planning to give it to Stanford. According to Grundfest, Ellison's reaction to his inquiry was one of "surprise."^[36] Ellison admitted to Grundfest that he said something of that sort, but contended that whatever he said was merely a "passing" comment.^[37] Plus, Ellison said, Stanford would, of course, not want his $100 million home unless it came with a "dowry" — i.e., an endowment to support what is sure to be a costly maintenance budget.^[38] Stanford's Vice President for Development, John Ford, claimed that to the best of his knowledge Ellison had not promised anyone at Stanford that he would give Stanford his Woodside home.^[39]

In order to buttress the argument that Stanford did not feel beholden to him, Ellison shared with the court the (otherwise private) fact that one of his children had applied to Stanford in October 2000 and was not admitted.^[40] If Stanford felt comfortable rejecting Ellison's child, the SLC contends, why should the SLC members hesitate before recommending that Oracle press insider trading-based fiduciary duty claims against Ellison?^[41]

But the fact remains that Ellison was still talking very publicly and seriously about the possibility of endowing a graduate interdisciplinary studies program at Stanford during the summer after his child was rejected from Stanford's undergraduate program.^[42]

C. The SLC's Argument

The SLC contends that even together, these facts regarding the ties among Oracle, the Trading Defendants, Stanford, and the SLC members do not impair the SLC's independence. In so arguing, the SLC places great weight on the fact that none [936] of the Trading Defendants have the practical ability to deprive either Grundfest or Garcia-Molina of their current positions at Stanford. Nor, given their tenure, does Stanford itself have any practical ability to punish them for taking action adverse to Boskin, Lucas, or Ellison — each of whom, as we have seen, has contributed (in one way or another) great value to Stanford as an institution. As important, neither Garcia-Molina nor Grundfest are part of the official fundraising apparatus at Stanford; thus, it is not their on-the-job duty to be solicitous of contributors, and fundraising success does not factor into their treatment as professors.

In so arguing, the SLC focuses on the language of previous opinions of this court and the Delaware Supreme Court that indicates that a director is not independent only if he is dominated and controlled by an interested party, such as a Trading Defendant.^[43] The SLC also emphasizes that much of our jurisprudence on independence focuses on economically consequential relationships between the allegedly interested party and the directors who allegedly cannot act independently of that director. Put another way, much of our law focuses the bias inquiry on whether there are economically material ties between the interested party and the director whose impartiality is questioned, treating the possible effect on one's personal wealth as the key to the independence inquiry. Putting a point on this, the SLC cites certain decisions of Delaware courts concluding that directors who are personal friends of an interested party were not, by virtue of those personal ties, to be labeled non-independent.^[44]

More subtly, the SLC argues that university professors simply are not inhibited types, unwilling to make tough decisions even as to fellow professors and large contributors. What is tenure about if not to provide professors with intellectual freedom, even in non-traditional roles such as special litigation committee members? No less ardently — but with no record evidence that reliably supports its ultimate point — the SLC contends that Garcia-Molina and Grundfest are extremely distinguished in their fields and were not, in fact, influenced by the facts identified heretofore. Indeed, the SLC argues, how could they have been influenced by many of these facts when they did not learn them until the post-Report discovery process? If it boils down to the simple fact that both share with Boskin the status of a Stanford professor, how material can this be when there are 1,700 others who also occupy the same position?

D. The Plaintiffs' Arguments

The plaintiffs confronted these arguments with less nuance than was helpful. Rather than rest their case on the multiple facts I have described, the plaintiffs chose to emphasize barely plausible constructions of the evidence, such as that Grundfest was lying when he could not recall being asked to participate in the Ellison Scholars Program. From these more extreme arguments, however, one can distill a reasoned core that emphasizes what academics might call the "thickness" of the social and institutional connections among [937] Oracle, the Trading Defendants, Stanford, and the SLC members. These connections, the plaintiffs argue, were very hard to miss — being obvious to anyone who entered the SIEPR facility, to anyone who read the Wall Street Journal, Fortune, or the Washington Post, and especially to Stanford faculty members interested in their own university community and with a special interest in Oracle. Taken in their totality, the plaintiffs contend, these connections simply constitute too great a bias-producing factor for the SLC to meet its burden to prove its independence.

Even more, the plaintiffs argue that the SLC's failure to identify many of these connections in its Report is not an asset proving its independence, but instead a fundamental flaw in the Report itself, which is the document in which the SLC is supposed to demonstrate its own independence and the reasonableness of its investigation. By failing to focus on these connections when they were obviously discoverable and when it is, at best, difficult for the court to believe that at least some of them were not known by the SLC — e.g., Boskin's role at SIEPR and the fact that the SIEPR Conference Center was named after Lucas — the SLC calls into doubt not only its independence, but its competence. If it could not ferret out these things, by what right should the court trust its investigative acumen?

In support of its argument, the plaintiffs note that the Delaware courts have adopted a flexible, fact-based approach to the determination of directorial independence. This test focuses on whether the directors, for any substantial reason, cannot act with only the best interests of the corporation in mind, and not just on whether the directors face pecuniary damage for acting in a particular way.

E. The Court's Analysis of the SLC's Independence

Having framed the competing views of the parties, it is now time to decide.

I begin with an important reminder: the SLC bears the burden of proving its independence. It must convince me.

But of what? According to the SLC, its members are independent unless they are essentially subservient to the Trading Defendants — i.e., they are under the "domination and control" of the interested parties.^[45] If the SLC is correct and this is the central inquiry in the independence determination, they would win. Nothing in the record suggests to me that either Garcia-Molina or Grundfest are dominated and controlled by any of the Trading Defendants, by Oracle, or even by Stanford.^[46]

But, in my view, an emphasis on "domination and control" would serve only to fetishize much-parroted language, at the cost of denuding the independence inquiry of its intellectual integrity. Take an easy example. Imagine if two brothers were on a corporate board, each successful in different businesses and not dependent in any way on the other's beneficence in order to be wealthy. The brothers are brothers, they stay in touch and consider each other family, but each is opinionated and strong-willed. A derivative action is filed targeting a transaction involving one of the brothers. The other brother is put [938] on a special litigation committee to investigate the case. If the test is domination and control, then one brother could investigate the other. Does any sensible person think that is our law? I do not think it is.

And it should not be our law. Delaware law should not be based on a reductionist view of human nature that simplifies human motivations on the lines of the least sophisticated notions of the law and economics movement. Homo sapiens is not merely homo economicus. We may be thankful that an array of other motivations exist that influence human behavior; not all are any better than greed or avarice, think of envy, to name just one. But also think of motives like love, friendship, and collegiality, think of those among us who direct their behavior as best they can on a guiding creed or set of moral values.^[47]

Nor should our law ignore the social nature of humans. To be direct, corporate directors are generally the sort of people deeply enmeshed in social institutions. Such institutions have norms, expectations that, explicitly and implicitly, influence and channel the behavior of those who participate in their operation.^[48] Some things are "just not done," or only at a cost, which might not be so severe as a loss of position, but may involve a loss of standing in the institution. In being appropriately sensitive to this factor, our law also cannot assume — absent some proof of the point — that corporate directors are, as a general matter, persons of unusual social bravery, who operate heedless to the inhibitions that social norms generate for ordinary folk.

For all these reasons, this court has previously held that the Delaware Supreme Court's teachings on independence can be summarized thusly:

At bottom, the question of independence turns on whether a director is, for any substantial reason, incapable of making a decision with only the best interests of the corporation in mind. That is, the Supreme Court cases ultimately focus on impartiality and objectivity.^[49]

This formulation is wholly consistent with the teaching of Aronson, which defines independence as meaning that "a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences."^[50] As noted by Chancellor Chandler recently, a director may be compromised if he is beholden to an interested person.^[51] Beholden in this sense does not [939] mean just owing in the financial sense, it can also flow out of "personal or other relationships" to the interested party.^[52]

Without backtracking from these general propositions, it would be less than candid if I did not admit that Delaware courts have applied these general standards in a manner that has been less than wholly consistent. Different decisions take a different view about the bias-producing potential of family relationships, not all of which can be explained by mere degrees of consanguinity.^[53] Likewise, there is admittedly case law that gives little weight to ties of friendship in the independence inquiry.^[54] In this opinion, I will not venture to do what I believe to be impossible: attempt to rationalize all these cases in their specifics.^[55] Rather, I undertake what I understand to be my duty and what is possible: the application of the independence inquiry that our Supreme Court has articulated in a manner that is faithful to its essential spirit.

1. The Contextual Nature of the Independence Inquiry Under Delaware Law

In examining whether the SLC has met its burden to demonstrate that there is no material dispute of fact regarding its independence, the court must bear in mind the function of special litigation committees under our jurisprudence. Under Delaware law, the primary means by which corporate defendants may obtain a dismissal of a derivative suit is by showing that the plaintiffs have not met their pleading burden under the test of Aronson v. Lewis,^[56] or the related standard set forth in Rales v. Blasband.^[57] In simple terms, these tests permit a corporation to terminate a derivative suit if its board is comprised of directors who can impartially consider a demand.^[58]

Special litigation committees are permitted as a last chance for a corporation to control a derivative claim in circumstances when a majority of its directors cannot [940] impartially consider a demand. By vesting the power of the board to determine what to do with the suit in a committee of independent directors, a corporation may retain control over whether the suit will proceed, so long as the committee meets the standard set forth in Zapata.

In evaluating the independence of a special litigation committee, this court must take into account the extraordinary importance and difficulty of such a committee's responsibility. It is, I daresay, easier to say no to a friend, relative, colleague, or boss who seeks assent for an act (e.g., a transaction) that has not yet occurred than it would be to cause a corporation to sue that person. This is admittedly a determination of so-called "legislative fact," but one that can be rather safely made.^[59] Denying a fellow director the ability to proceed on a matter important to him may not be easy, but it must, as a general matter, be less difficult than finding that there is reason to believe that the fellow director has committed serious wrongdoing and that a derivative suit should proceed against him.^[60]

The difficulty of making this decision is compounded in the special litigation committee context because the weight of making the moral judgment necessarily falls on less than the full board. A small number of directors feels the moral gravity — and social pressures — of this duty alone.

For all these reasons, the independence inquiry is critically important if the special litigation committee process is to retain its integrity, a quality that is, in turn, essential to the utility of that process. As this Court wrote recently:

One of the obvious purposes for forming a special litigation committee is to promote confidence in the integrity of corporate decision making by vesting the company's power to respond to accusations of serious misconduct by high officials in an impartial group of independent directors. By forming a committee whose fairness and objectivity cannot be reasonably questioned ... the company can assuage concern among its stockholders and retain, through the SLC, control over any claims belonging to the company itself.

* * *

Zapata presents an opportunity for a board that cannot act impartially as a whole to vest control of derivative litigation in a trustworthy committee of the board — i.e., one that is not compromised in its ability to act impartially. The composition and conduct of a special litigation committee therefore must be such as to instill confidence in the judiciary and, as important, the stockholders of the company that the committee can act with integrity and objectivity.^[61]

Thus, in assessing the independence of the Oracle SLC, I necessarily examine the question of whether the SLC can independently make the difficult decision entrusted to it: to determine whether the Trading Defendants should face suit for insider trading-based allegations of breach of fiduciary duty. An affirmative answer by the SLC to that question would have potentially huge negative consequences [941] for the Trading Defendants, not only by exposing them to the possibility of a large damage award but also by subjecting them to great reputational harm. To have Professors Grundfest and Garcia-Molina declare that Oracle should press insider trading claims against the Trading Defendants would have been, to put it mildly, "news." Relatedly, it is reasonable to think that an SLC determination that the Trading Defendants had likely engaged in insider trading would have been accompanied by a recommendation that they step down as fiduciaries until their ultimate culpability was decided.

The importance and special sensitivity of the SLC's task is also relevant for another obvious reason: investigations do not follow a scientific process like an old-fashioned assembly line. The investigators' mindset and talent influence, for good or ill, the course of an investigation. Just as there are obvious dangers from investigators suffering from too much zeal, so too are dangers posed by investigators who harbor reasons not to pursue the investigation's targets with full vigor.

The nature of the investigation is important, too. Here, for example, the SLC was required to undertake an investigation that could not avoid a consideration of the subjective state of mind of the Trading Defendants. Their credibility was important, and the SLC could not escape making judgments about that, no matter how objective the criteria the SLC attempted to use.

Therefore, I necessarily measure the SLC's independence contextually, and my ruling confronts the SLC's ability to decide impartially whether the Trading Defendants should be pursued for insider trading. This contextual approach is a strength of our law, as even the best minds have yet to devise across-the-board definitions that capture all the circumstances in which the independence of directors might reasonably be questioned. By taking into account all circumstances, the Delaware approach undoubtedly results in some level of indeterminacy, but with the compensating benefit that independence determinations are tailored to the precise situation at issue.^[62]

[942] Likewise, Delaware law requires courts to consider the independence of directors based on the facts known to the court about them specifically, the so-called "subjective `actual person' standard."^[63] That said, it is inescapable that a court must often apply to the known facts about a specific director a consideration of how a reasonable person similarly situated to that director would behave, given the limited ability of a judge to look into a particular director's heart and mind. This is especially so when a special litigation committee chooses, as was the case here, to eschew any live witness testimony, a decision that is, of course, sensible lest special litigation committee termination motions turn into trials nearly as burdensome as the derivative suit the committee seeks to end. But with that sensible choice came an acceptance of the court's need to infer that the special litigation committee members are persons of typical professional sensibilities.

2. The SLC Has Not Met Its Burden to Demonstrate the Absence of a Material Dispute of Fact About Its Independence

Using the contextual approach I have described, I conclude that the SLC has not met its burden to show the absence of a material factual question about its independence. I find this to be the case because the ties among the SLC, the Trading Defendants, and Stanford are so substantial that they cause reasonable doubt about the SLC's ability to impartially consider whether the Trading Defendants should face suit. The concern that arises from these ties can be stated fairly simply, focusing on defendants Boskin, Lucas, and Ellison in that order, and then collectively.

As SLC members, Grundfest and Garcia-Molina were already being asked to consider whether the company should level extremely serious accusations of wrongdoing against fellow board members. As to Boskin, both SLC members faced another layer of complexity: the determination of whether to have Oracle press insider trading claims against a fellow professor at their university. Even though Boskin was in a different academic department from either SLC member, it is reasonable to assume that the fact that Boskin was also on faculty would — to persons possessing typical sensibilities and institutional loyalty — be a matter of more than trivial concern. Universities are obviously places of at-times intense debate, but they also see themselves as communities. In fact, Stanford refers to itself as a "community of scholars."^[64] To accuse a fellow professor — whom one might see at the faculty club or at inter-disciplinary presentations of academic papers — of insider trading cannot be a small thing — even for the most callous of academics.

As to Boskin, Grundfest faced an even more complex challenge than Garcia-Molina. Boskin was a professor who had taught him and with whom he had maintained contact over the years. Their areas of academic interest intersected, putting Grundfest in contact if not directly with Boskin, then regularly with Boskin's colleagues. Moreover, although I am told by the SLC that the title of senior fellow at SIEPR is an honorary one, the fact remains that Grundfest willingly accepted it and was one of a select number of faculty who attained that status. And, they both just happened to also be steering committee members. Having these ties, Grundfest [943] (I infer) would have more difficulty objectively determining whether Boskin engaged in improper insider trading than would a person who was not a fellow professor, had not been a student of Boskin, had not kept in touch with Boskin over the years, and who was not a senior fellow and steering committee member at SIEPR.

In so concluding, I necessarily draw on a general sense of human nature. It may be that Grundfest is a very special person who is capable of putting these kinds of things totally aside. But the SLC has not provided evidence that that is the case. In this respect, it is critical to note that I do not infer that Grundfest would be less likely to recommend suit against Boskin than someone without these ties. Human nature being what it is, it is entirely possible that Grundfest would in fact be tougher on Boskin than the would on someone with whom he did not have such connections. The inference I draw is subtly, but importantly, different. What I infer is that a person in Grundfest's position would find it difficult to assess Boskin's conduct without pondering his own association with Boskin and their mutual affiliations. Although these connections might produce bias in either a tougher or laxer direction, the key inference is that these connections would be on the mind of a person in Grundfest's position, putting him in the position of either causing serious legal action to be brought against a person with whom he shares several connections (an awkward thing) or not doing so (and risking being seen as having engaged in favoritism toward his old professor and SIEPR colleague).

The same concerns also exist as to Lucas. For Grundfest to vote to accuse Lucas of insider trading would require him to accuse SIEPR's Advisory Board Chair and major benefactor of serious wrongdoing — of conduct that violates federal securities laws. Such action would also require Grundfest to make charges against a man who recently donated $50,000 to Stanford Law School after Grundfest made a speech at his request.^[65]

And, for both Grundfest and Garcia-Molina, service on the SLC demanded that they consider whether an extremely generous and influential Stanford alumnus should be sued by Oracle for insider trading. Although they were not responsible for fundraising, as sophisticated professors they undoubtedly are aware of how important large contributors are to Stanford, and they share in the benefits that come from serving at a university with a rich endowment. A reasonable professor giving any thought to the matter would obviously consider the effect his decision might have on the University's relationship with Lucas, it being (one hopes) sensible to infer that a professor of reasonable collegiality and loyalty cares about the well-being of the institution he serves.

In so concluding, I give little weight to the SLC's argument that it was unaware of just how substantial Lucas's beneficence to Stanford has been. I do so for two key reasons. Initially, it undermines, rather than inspires, confidence that the SLC did not examine the Trading Defendant's ties to Stanford more closely in preparing its Report. The Report's failure to identify these ties is important because it is the SLC's burden to show independence. In forming the SLC, the Oracle board should have undertaken a thorough consideration of the facts bearing on the independence of the proposed SLC members from the key objects of the investigation.

[944] The purported ignorance of the SLC members about all of Lucas's donations to Stanford is not helpful to them for another reason: there were too many visible manifestations of Lucas's status as a major contributor for me to conclude that Grundfest, at the very least, did not understand Lucas to be an extremely generous benefactor of Stanford. It is improbable that Grundfest was not aware that Lucas was the Chair of SIEPR's Advisory Board, and Grundfest must have known that the Donald L. Lucas Conference Center at SIEPR did not get named that way by coincidence. And, in February 2002 — incidentally, the same month the SLC was formed — Grundfest spoke at a meeting of "SIEPR Associates," a group of individuals who had given $5,000 or more to SIEPR.^[66] Although it is not clear if Lucas attended that event, he is listed — in the same publication that reported Grundfest's speech at the Associates' meeting — as one of SIEPR's seventy-five "Associates."^[67] Combined with the other obvious indicia of Lucas's large contributor status (including the $50,000 donation Lucas made to Stanford Law School to thank Grundfest for giving a speech) and Lucas's obviously keen interest in his alma matter, Grundfest would have had to be extremely insensitive to his own working environment not to have considered Lucas an extremely generous alumni benefactor of Stanford, and at SIEPR and the Law School in particular.

Garcia-Molina is in a somewhat better position to disclaim knowledge of how generous an alumnus Lucas had been. Even so, the scope of Lucas's activities and their easy discoverability gives me doubt that he did not know of the relative magnitude of Lucas's generosity to Stanford.^[68] Furthermore, Grundfest comprised half of the SLC and was its most active member. His non-independence is sufficient alone to require a denial of the SLC's motion.^[69]

[945] In concluding that the facts regarding Lucas's relationship with Stanford are materially important, I must address a rather odd argument of the SLC's. The argument goes as follows. Stanford has an extremely large endowment. Lucas's contributions, while seemingly large, constitute a very small proportion of Stanford's endowment and annual donations. Therefore, Lucas could not be a materially important contributor to Stanford and the SLC's independence could not be compromised by that factor.

But missing from that syllogism is any acknowledgement of the role that Stanford's solicitude to benefactors like Lucas might play in the overall size of its endowment and campus facilities. Endowments and buildings grow one contribution at a time, and they do not grow by callous indifference to alumni who (personally and through family foundations) have participated in directing contributions of the size Lucas has. Buildings and conference centers are named as they are as a recognition of the high regard universities have for donors (or at least, must feign convincingly). The SLC asks me to believe that what universities like Stanford say in thank you letters and public ceremonies is not in reality true; that, in actuality, their contributors are not materially important to the health of those academic institutions. This is a proposition that the SLC has not convinced me is true, and that seems to contradict common experience.

Nor has the SLC convinced me that tenured faculty are indifferent to large contributors to their institutions, such that a tenured faculty member would not be worried about writing a report finding that a suit by the corporation should proceed against a large contributor and that there was credible evidence that he had engaged in illegal insider trading. The idea that faculty members would not be concerned that action of that kind might offend a large contributor who a university administrator or fellow faculty colleague (e.g., Shoven at SIEPR) had taken the time to cultivate strikes me as implausible and as resting on an narrow-minded understanding of the way that collegiality works in institutional settings.

In view of the ties involving Boskin and Lucas alone, I would conclude that the SLC has failed to meet its burden on the independence question. The tantalizing facts about Ellison merely reinforce this conclusion. The SLC, of course, argues that Ellison is not a large benefactor of Stanford personally, that Stanford has demonstrated its independence of him by rejecting his child for admission, and that, in any event, the SLC was ignorant of any negotiations between Ellison and Stanford about a large contribution. For these reasons, the SLC says, its ability to act independently of Ellison is clear.

I find differently. The notion that anyone in Palo Alto can accuse Ellison of insider trading without harboring some fear of social awkwardness seems a stretch. That being said, I do not mean to imply that the mere fact that Ellison is worth tens of billions of dollars and is the key force behind a very important social institution in Silicon Valley disqualifies all persons who live there from being independent of him. Rather, it is merely an acknowledgement of the simple fact that accusing such a significant person in that community of such serious wrongdoing is no small thing.

Given that general context, Ellison's relationship to Stanford itself contributes to my overall doubt, when heaped on top of the ties involving Boskin and Lucas. During the period when Grundfest and Garcia-Molina were being added to the Oracle board, Ellison was publicly considering making extremely large contributions to Stanford. Although the SLC denies [946] knowledge of these public statements, Grundfest claims to have done a fair amount of research before joining the board, giving me doubt that he was not somewhat aware of the possibility that Ellison might bestow large blessings on Stanford. This is especially so when I cannot rule out the possibility that Grundfest had been told by Lucas about, but has now honestly forgotten, the negotiations over the Ellison Scholars Program.

Furthermore, the reality is that whether or not Ellison eventually decided not to create that Program and not to bequeath his house to Stanford, Ellison remains a plausible target of Stanford for a large donation. This is especially so in view of Oracle's creation of the Oracle Help Us Help Foundation with Stanford and Ellison's several public indications of his possible interest in giving to Stanford. And, while I do not give it great weight, the fact remains that Ellison's medical research foundation has been a source of nearly $10 million in funding to Stanford. Ten million dollars, even today, remains real money.

Of course, the SLC says these facts are meaningless because Stanford rejected Ellison's child for admission. I am not sure what to make of this fact, but it surely cannot bear the heavy weight the SLC gives it. The aftermath of denying Ellison's child admission might, after all, as likely manifest itself in a desire on the part of the Stanford community never to offend Ellison again, lest he permanently write off Stanford as a possible object of his charitable aims — as the sort of thing that acts as not one, but two strikes, leading the batter to choke up on the bat so as to be even more careful not to miss the next pitch. Suffice to say that after the rejection took place, it did not keep Ellison from making public statements in Fortune magazine on August 13, 2001 about his consideration of making a huge donation to Stanford, at the same time when the two SLC members were being courted to join the Oracle board.

As an alternative argument, the SLC contends that neither SLC member was aware of Ellison's relationship with Stanford until after the Report was completed. Thus, this relationship, in its various facets, could not have compromised their independence. Again, I find this argument from ignorance to be unavailing. An inquiry into Ellison's connections with Stanford should have been conducted before the SLC was finally formed and, at the very least, should have been undertaken in connection with the Report. In any event, given how public Ellison was about his possible donations it is difficult not to harbor troublesome doubt about whether the SLC members were conscious of the possibility that Ellison was pondering a large contribution to Stanford. In so concluding, I am not saying that the SLC members are being untruthful in saying that they did not know of the facts that have emerged, only that these facts were in very prominent journals at the time the SLC members were doing due diligence in aid of deciding whether to sign on as Oracle board members. The objective circumstances of Ellison's relations with Stanford therefore generate a reasonable suspicion that seasoned faculty members of some sophistication — including the two SLC members — would have viewed Ellison as an active and prized target for the University. The objective circumstances also require a finding that Ellison was already, through his personal Foundation and Oracle itself, a benefactor of Stanford.

Taken in isolation, the facts about Ellison might well not be enough to compromise the SLC's independence. But that is not the relevant inquiry. The pertinent question is whether, given all the facts, the SLC has met its independence burden.

[947] When viewed in that manner, the facts about Ellison buttress the conclusion that the SLC has not met its burden. Whether the SLC members had precise knowledge of all the facts that have emerged is not essential, what is important is that by any measure this was a social atmosphere painted in too much vivid Stanford Cardinal red for the SLC members to have reasonably ignored it. Summarized fairly, two Stanford professors were recruited to the Oracle board in summer 2001 and soon asked to investigate a fellow professor and two benefactors of the University. On Grundfest's part, the facts are more substantial, because his connections — through his personal experiences, SIEPR, and the Law School — to Boskin and to Lucas run deeper.

It seems to me that the connections outlined in this opinion would weigh on the mind of a reasonable special litigation committee member deciding whether to level the serious charge of insider trading against the Trading Defendants. As indicated before, this does not mean that the SLC would be less inclined to find such charges meritorious, only that the connections identified would be on the mind of the SLC members in a way that generates an unacceptable risk of bias. That is, these connections generate a reasonable doubt about the SLC's impartiality because they suggest that material considerations other than the best interests of Oracle could have influenced the SLC's inquiry and judgments.

Before closing, it is necessary to address two concerns. The first is the undeniable awkwardness of opinions like this one. By finding that there exists too much doubt about the SLC's independence for the SLC to meet its Zapata burden, I make no finding about the subjective good faith of the SLC members, both of whom are distinguished academics at one of this nation's most prestigious institutions of higher learning.^[70] Nothing in this record leads me to conclude that either of the SLC members acted out of any conscious desire to favor the Trading Defendants or to do anything other than discharge their duties with fidelity. But that is not the purpose of the independence inquiry.

That inquiry recognizes that persons of integrity and reputation can be compromised in their ability to act without bias when they must make a decision adverse to others with whom they share material affiliations. To conclude that the Oracle SLC was not independent is not a conclusion that the two accomplished professors who comprise it are not persons of good faith and moral probity, it is solely to conclude that they were not situated to act with the required degree of impartiality. Zapata requires independence to ensure that stockholders do not have to rely upon special litigation committee members who must put aside personal considerations that are ordinarily influential in daily behavior in making the already difficult decision to accuse fellow directors of serious wrongdoing.

Finally, the SLC has made the argument that a ruling against it will chill the ability of corporations to locate qualified independent directors in the academy. This is overwrought. If there are 1,700 professors at Stanford alone, as the SLC says, how many must there be on the west coast of the United States, at institutions without ties to Oracle and the Trading Defendants as substantial as Stanford's? Undoubtedly, a corporation of Oracle's market capitalization could have found prominent academics willing to serve as [948] SLC members, about whom no reasonable question of independence could have been asserted.

Rather than form an SLC whose membership was free from bias-creating relationships, Oracle formed a committee fraught with them. As a result, the SLC has failed to meet its Zapata burden, and its motion to terminate must be denied. Because of this reality, I do not burden the reader with an examination of the other Zapata factors. In the absence of a finding that the SLC was independent, its subjective good faith and the reasonableness of its conclusions would not be sufficient to justify termination. Without confidence that the SLC was impartial, its findings do not provide the assurance our law requires for the dismissal of a derivative suit without a merits inquiry.

V. Conclusion

The SLC's motion to terminate is DENIED. IT IS SO ORDERED.

[1] 430 A.2d 779 (Del.1981).

[2] E.g., Lewis v. Fuqua, 502 A.2d 962 (Del.Ch. 1985).

[3] Parfi Holding AB v. Mirror Image Internet, Inc., 794 A.2d 1211, 1232 (Del.Ch.2001) (emphasis in original), rev'd in part on other grounds, 817 A.2d 149 (Del.2002), cert. denied, ___ U.S. ___, 123 S.Ct. 2076, ___ L.Ed.2d ___ (2003).

[4] Id.

[5] 70 A.2d 5 (Del.Ch.1949).

[6] In re Caremark Int'l Derivative Litig., 698 A.2d 959 (Del.Ch.1996).

[7] See In re Oracle Corp. Sec. Litig., No. C 01-0988 MJJ, slip op. at 2 (N.D.Cal. Mar. 24, 2003).

[8] In the interests of full disclosure, I spoke at the Directors' College in spring 2002.

[9] 802 A.2d 257 (Del.2002).

[10] See Grundfest Dep. at 466-69; Garcia-Molina Dep. at 15-16.

[11] The plaintiffs claim that Grundfest prejudged the Trading Defendants' culpability in a manner equivalent to that of the Chairman of the HealthSouth special litigation committee, as discussed in the recent Biondi v. Scrushy, 820 A.2d 1148 (Del.Ch.2003) decision. The two situations are not reasonably comparable. In Biondi, the HealthSouth SLC Chairman publicly announced his conclusion that the HealthSouth CEO, who was the target of the SLC's investigation, had not acted with the required scienter. He did so in a company press release in advance of the SLC's own investigation. Here, Grundfest simply made a judgment that Ellison and Henley had given a plausible accounting for themselves and were, in general, reputable businessmen with whom he was comfortable serving as a fellow director. I find credible Grundfest's contention that he took their statements for what they were, statements by persons with a self-interest in exculpation. That said, it would have been a better practice for the Report to have identified that Grundfest had inquired about the Federal Class Action in determining whether to join Oracle's board. Cf. Report at VII-1 ("The interviews commenced in April 2002 and were completed by early November 2002.").

[12] Some six years before the SLC investigation began, Simpson Thacher had performed a modest amount of legal work for Oracle. Simpson Thacher also represents Cadence Design Systems, a company of which Trading Defendant Donald Lucas is a director, and had billed Cadence less than $50,000 for that work. In 1996-1997, Simpson Thacher also billed Cadence for $62,355 for certain legal advice. The SLC determined that the Cadence work was not material to Simpson Thacher and the plaintiffs have not challenged that determination.

[13] As part of its analysis, the SLC assumed that Lucas and Boskin possessed the same information base as Ellison and Henley — that of a hypothetical fully informed executive. Nonetheless, the Report also made specific findings as to Lucas and Boskin that emphasized that they were differently situated in terms of informational access.

[14] The SLC also noted that the Trading Defendants had sold their shares during a permissible trading window under Oracle's internal policies. These policies generally discouraged trading in the last month of a quarter and channeled trading into periods after the market had absorbed SEC filings.

[15] There was also evidence in the Report that Ellison's financial advisor had been hounding him for some time to sell some shares and to diversify. The taxes due on the expiring options were also large and provided a rationale for selling, as did Ellison's and his financial advisor's desire for Ellison to reduce some debt. Although these were motives for Ellison to obtain cash, the SLC concluded that Ellison had no compelling need for funds that supported an inference of scienter.

[16] As with Ellison, both Boskin and Lucas had cash needs, in their cases related to residences, but nothing in the record created by the SLC indicates any exigency.

[17] Zapata v. Maldonado, 430 A.2d 779, 788-89 (Del.1981); Katell v. Morgan Stanley Group, 1995 WL 376952, at *5 (Del.Ch. June 15, 1995).

[18] Zapata, 430 A.2d at 789.

[19] See id. at 788.

[20] See Lewis v. Fuqua, 502 A.2d 962, 966 (Del.Ch.1985); Kaplan v. Wyatt, 484 A.2d 501, 506-08 (Del.Ch.1984), aff'd, 499 A.2d 1184 (Del.1985). Importantly, the granting of the SLC's motion using the Rule 56 standard does not mean that the court has made a determination that the claims the SLC wants dismissed would be subject to termination on a summary judgment motion, only that the court is satisfied that there is no material factual dispute that the SLC had a reasonable basis for its decision to seek termination. See Kaplan v. Wyatt, 484 A.2d 501, 519 (Del.Ch. 1984) ("[I]t is the Special Litigation Committee which is under examination at this first-step stage of the proceedings, and not the merits of the plaintiff's cause of action."), aff'd, 499 A.2d 1184 (Del.1985).

[21] Compare In re The Limited, Inc. S'holders Litig., 2002 WL 537692, at *6-*7 (Del.Ch. Mar. 27, 2002) (concluding that a university president who had solicited a $25 million contribution from a corporation's President, Chairman, and CEO was not independent of that corporate official in light of the sense of "owingness" that the university president might harbor with respect to the corporate official), and Lewis v. Fuqua, 502 A.2d 962, 966-67 (Del.Ch.1985) (finding that a special litigation committee member was not independent where the committee member was also the president of a university that received a $10 million charitable pledge from the corporation's CEO and the CEO was a trustee of the university), with In re Walt Disney Co. Derivative Litig., 731 A.2d 342, 359 (Del.Ch. 1998) (deciding that the plaintiffs had not created reasonable doubt as to a director's independence where a corporation's Chairman and CEO had given over $1 million in donations to the university at which the director was the university president and from which one of the CEO's sons had graduated), aff'd in part, rev'd in part sub nom. Brehm v. Eisner, 746 A.2d 244 (Del.2000).

[22] Stanford Institute for Economic Policy Research, SIEPR Staff and Researchers: Senior Fellows (last visited June 4, 2003), at http://siepr.stanford.edu/people/srfellows.html.

[23] Stanford Institute for Economic Policy Research, Insider SIEPR: Steering Committee (last visited June 4, 2003), at http://siepr.stanford.edu/about/steering.html.

[24] See Sprott Aff. ¶¶ 7-8.

[25] See, e.g., Pls.' Ex. H, at DID 000035-DID 000036 (stating that if any of the principal researchers are unable to carry out funded project, Stanford may nominate a replacement researcher, subject to the approval of the Foundation).

[26] The other three directors are named by Oracle. See Help Us Help Foundation, About Us (last visited June 5, 2003), at http://www.helpushelp.org/pages/AboutUs.html# board.

[27] Shovan's proposal for the Ellison Scholars Program was dated October 2000. See Pls.' Ex. H, at DID 0000181.

[28] CD-ROM: SIEPR (on file as Weiser Aff. Ex. 2); see also SLC's Supplemental Br. at 5 (identifying the CD-ROM's video clip as that of a speech given by Ellison at SIEPR in February 2001).

[29] Lucas Dep. at 25.

[30] See Grundfest Dep. at 517-18.

[31] See David Bank, Oracle CEO Ellison Will Decide Which School Gets Millions, Wall St. J., June 11, 2001, available at 2001 WL-WSJ 2866209 ("Mr. Ellison, chairman and chief executive officer of Oracle Corp., said he is deciding between Harvard University and Stanford University as the site for an interdisciplinary center he has dubbed PET, for politics, economics and technology.").

[32] Brent Schlender, Larry Ellison: The Playboy Philanthropist, Fortune, Aug. 13, 2001, available at http://www.fortune.com/fortune/print/0,15935,370710,00.html.

[33] See Mark Leibovich, The Outsider, His Business and His Billions, Wash. Post, Oct. 30, 2000, available at 2000 WL 25425247.

[34] Ellison Aff. ¶ 15.

[35] See id.

[36] See Grundfest Dep. at 520.

[37] See id.

[38] See id. at 520-21.

[39] See Ford Aff. ¶ 9.

[40] I mention this fact only with the greatest of reluctance. Ellison and the SLC injected this into the record, despite the fact that Stanford itself would have been legally prohibited from disclosing it. Because it is an argument advanced by the SLC, I must address it, although that necessarily furthers the intrusion on the privacy of Ellison's child.

[41] See SLC's Reply Br. at 31-32.

[42] See David Bank, Oracle CEO Ellison Will Decide Which School Gets Millions, Wall St. J., June 11, 2001, available at 2001 WL-WSJ 2866209; Brent Schlender, Larry Ellison: The Playboy Philanthropist, Fortune, Aug. 13, 2001, available at http://www.fortune.com/fortune/print/0,15935,370710,00.html.

[43] E.g., In re Walt Disney Co. Derivative Litig., 731 A.2d at 355.

[44] See, e.g., Crescent/Mach I Partners, L.P. v. Turner, 2000 WL 1481002, at *11 (Del.Ch. Sept. 29, 2000) (stating that an allegation of a fifteen-year professional and personal relationship between a CEO and a director does not, in itself, raise a reasonable doubt about the director's independence); In re Walt Disney Co. Derivative Litig., 731 A.2d at 354 n. 18 ("Demand is not excused, however, just because directors would have to sue `their family, friends and business associates.'" (quoting Abrams v. Koether, 766 F.Supp. 237, 256 (D.N.J.1991)).

[45] See, e.g., In re Walt Disney Co. Derivative Litig., 731 A.2d at 355.

[46] This is not to say that the facts could not be simply read as providing a basis for a professor interested in promotion within the University to be less than aggressive as an SLC member. Even tenured professors and department chairs sometimes seek different chairs, duties, or even to climb to positions like Provost, which chart the path towards a university presidency. I do not consider this factor to be of weight here, however, but note it.

[47] In an interesting work, Professor Lynn Stout has argued that there exists an empirical basis to infer that corporate directors are likely to be motivated by altruistic impulses and not simply by a concern for their own pocketbooks. See Lynn A. Stout, In Praise of Procedure: An Economic and Behavioral Defense of Smith v. VanGorkom and the Business Judgment Rule, 96 Nw. U.L.Rev. 675, 677-78 (2002).

[48] See, e.g., Margaret M. Blair & Lynn A. Stout, Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law, 149 U. Pa. L.Rev. 1735, 1780 (2001) ("[T]here is reason to believe that trust may pay an important role in the success of many business firms."); Edward B. Rock & Michael L. Wachter, Islands of Conscious Power: Laws, Norms, and the Self-Governing Corporation, 149 U. Pa.L.Rev. 1619, 1640 (2001) ("[T]he myriad transactions that take place inside the firm are largely (but not entirely) protected by a... governance mechanism ... that is almost entirely not legally enforceable.").

[49] Parfi Holding AB v. Mirror Image Internet, Inc., 794 A.2d 1211, 1232 (Del.Ch.2001) (footnotes omitted) (emphasis in original), rev'd in part on other grounds, 817 A.2d 149 (Del. 2002), cert. denied, ___ U.S. ___, 123 S.Ct. 2076, ___ L.Ed.2d ___ (2003).

[50] Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984).

[51] See Orman v. Cullman, 794 A.2d 5, 24 (Del.Ch.2002).

[52] See id. at 24 n. 47 (citing Aronson, 473 A.2d at 815); see also Parfi Holding, 794 A.2d at 1232 n. 55 (citing definitions of beholden as meaning "[o]wing something ... to another" and "under obligation").

[53] Compare Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 889 (Del.Ch.1999) (CEO's brother-in-law could not impartially consider demand to sue him), and Mizel v. Connelly, 1999 WL 550369, at *4 (Del.Ch. Aug. 2, 1999) (grandson could not impartially determine whether company should accept demand that required company to sue his grandfather for rescission of an interested transaction), with Seibert v. Harper & Row, Publishers, Inc., 1984 WL 21874, at *3 (Del.Ch. Dec. 5, 1984) (a director was not disabled from considering a demand where the director's cousin was a fellow director and a corporate manager).

[54] E.g., Crescent/Mach I Partners, L.P. v. Turner, 2000 WL 1481002, at *11-*12 (Del.Ch. Sept. 29, 2000).

[55] I readily concede that the result I reach is in tension with the specific outcomes of certain other decisions. But I do not believe that the result I reach applies a new definition of independence; rather, it recognizes the importance (i.e., the materiality) of other bias-creating factors other than fear that acting a certain way will invite economic retribution by the interested directors.

[56] 473 A.2d 805 (Del.1984).

[57] 634 A.2d 927 (Del.1993).

[58] This is a simplified formulation of a more complex inquiry. One way for a plaintiff to impugn the impartiality of the board is to plead particularized facts creating a reasonable doubt that the board complied with its fiduciary duties. In that circumstance, the danger is that the board might be influenced by its desire to avoid personal liability in a lawsuit in which the plaintiffs have stated a claim under a heightened pleading burden. For a more thorough discussion of Aronson and Rales, see Guttman v. Huang, 823 A.2d 492 (Del.Ch.2003).

[59] See Kenneth Culp Davis, An Approach to Problems of Evidence in the Administrative Process, 55 Harv. L.Rev. 364, 402-03 (1942); Leo E. Strine, Jr., The Inescapably Empirical Foundation of the Common Law of Corporations, 27 Del. J. Corp. L. 499, 502-03 (2002).

[60] The parties have not cited empirical social science research bearing on any of the factual inferences about human behavior within institutional settings upon which a ruling on this motion, one way or the other, necessarily depends.

[61] Biondi v. Scrushy, 820 A.2d 1148, 1156 & 1166 (Del.Ch.2003).

[62] The recent reforms enacted by Congress and by the stock exchanges reflect a narrower conception of who they believe can be an independent director. These definitions, however, are blanket labels that do not take into account the decision at issue. Nonetheless, the definitions recognize that factors other than the ones explicitly identified in the new exchange rules might compromise a director's independence, depending on the circumstances. See Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. Relating to Corporate Governance, 68 Fed.Reg. 19,051, 19,053 (Apr. 17, 2003) ("It is not possible to anticipate, or explicitly provide for, all circumstances that might signal potential conflicts of interest, or that might bear on the materiality of a director's relationship to a listed company. Accordingly, it is best that boards making `independence' determinations broadly consider all relevant facts and circumstances. In particular, when assessing the materiality of a director's relationship with the company, the board should consider the issue not merely from the standpoint of the director, but also from that of persons or organizations with which the director has an affiliation. Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others."); Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the National Association of Securities Dealers, Inc. Relating to Proposed Amendments to NASD Rules 4200 and 4350 Regarding Board Independence and Independent Committees, 68 Fed.Reg. 14,451, 14,452 (Mar. 25, 2003) ("`Independent director' means a person other than an officer or employee of the company or its subsidiaries or any other individual 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.").

[63] Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1167 (Del.1995).

[64] See Stanford University, Stanford Facts 2003 (last modified Apr. 3, 2003), available at http://www.stanford.edu/home/stanford/facts/faculty.html.

[65] As noted, Lucas has contributed $149,000 to the Law School, $424,000 to SIEPR, and millions more to other Stanford institutions.

[66] See Joseph Grundfest Talks About Enron and Auditing Process Ethics, SIEPR Persp., Spring 2002, at 9, 9, available at http://siepr.stanford.edu/about/newsletter_spring2002.pdf.

[67] See id. at 15. Notably, Lucas is not listed as a "[n]ew donor," which suggests that he attained the rank of SIEPR Associate in a previous year or years, as well. See id.

[68] Professor Garcia-Molina denied in his deposition any specific knowledge of whether any of the Trading Defendants were donors to Stanford. He might well have told the truth despite the fact that there was evidence of it around Stanford's (admittedly large) campus and in the news at the same time as he was joining Oracle's board. As I have discussed, however, the purported ignorance of the SLC does not give me confidence, given the objective and discoverable facts available to the SLC members at the time. Even if I was convinced that Garcia-Molina was totally unaware of, for example, Lucas's status as an important alumni contributor — which I am not — that would not help the SLC, because Grundfest clearly was and the Report acknowledges both SLC members' knowledge that Lucas had made contributions. Moreover, Garcia-Molina clearly knew Boskin was a fellow professor, and the objective circumstances cause me to doubt that Garcia-Molina did not also suspect that Ellison was, if not already a major donor, then, at the very least, a major target for Stanford's development officers.

[69] See In re Walt Disney Co. Derivative Litig., 731 A.2d at 354 ("[U]nder Aronson's first prong—director independence—for demand to be futile, the Plaintiffs must show a reasonable doubt as to the disinterest of at least half of the directors."); Beneville v. York, 769 A.2d 80, 82 (Del.Ch.2000) (concluding that "[w]hen one member of a two-member board of directors cannot impartially consider a stockholder litigation demand" demand is excused); In re The Limited, Inc. S'holders Litig., 2002 WL 537692, at *7 ("[W]here the challenged actions are those of a board consisting of an even number of directors, plaintiffs meet their burden of demonstrating the futility of making demand on the board by showing that half of the board was either interested or not independent.").

[70] Lewis v. Fuqua, 502 A.2d at 964-65 (noting that a non-independence finding should not be equated with a determination that an SLC member acted improperly).