Jamie Dimon (“Dimon”) was an officer and director of Bank One. JP Morgan Chase (“Chase”) wanted to buy Bank One. Dimon, lead negotiator for the Bank One Board of Directors, stated the price would be “market” if Chase appointed him CEO of the merged companies immediately. Chase rejected Dimon’s overture, wanting to keep its own CEO in place immediately after the transaction. Chase then offered a purchase price that was a 14% premium over the market price of Bank One’s stock.
The Board of Directors of Bank One obtained a fairness opinion that the 14% premium transaction price was “fair” to the shareholders of Bank One, and disclosed the same in a proxy statement, but did not disclose Dimon’s overture to Chase that he become CEO for no premium. Bank One shareholders subsequently approved the transaction.
Certain shareholders of Bank One then sued the Board of Bank One, alleging the transaction price was too low, and that Dimon breached his fiduciary duty of loyalty to them by self-dealing for his own benefit. This article only addresses Dimon’s duty of loyalty to Bank One, and not whether the Bank One directors breached their duty of care in approving the transaction price.
The Court stated that since Bank One was a Delaware corporation, the laws of Delaware applied. The fiduciary duties owed by directors of a Delaware corporation are the duties of due care and loyalty. Delaware law is clear that the business and affairs of a corporation are managed by or under the direction of the board of directors.
The business judgment rule serves to protect and promote the role of the board as the ultimate manager of the corporation. Because courts are ill-equipped to engage in post hoc substantive review of business decisions, the business judgment rule operates to preclude a court from imposing itself unreasonably in the business and affairs of a corporation. The business judgment rule creates a “presumption that in making a business decision, the directors of a corporation acted on an informed basis . . . and in the honest belief that the action taken was in the best interests of the company [and its shareholders.
This presumption can be rebutted by a showing that the board violated one of its fiduciary duties in connection with the challenged transaction. If the business judgment rule is rebutted, the burden shifts to the director defendants to demonstrate that the challenged transaction was “entirely fair” to the corporation and the plaintiff shareholders. Under the entire fairness standard of judicial review, the defendant directors must establish that the transaction was the product of fair dealing and fair price.
The Delaware Supreme Court has defined the duty of loyalty of officers and directors to their corporation and its shareholders in broad and unyielding terms: “Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests . . . . A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to the corporation demands that there be no conflict between duty and self-interest.”
Essentially, the duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally. The classic examples of director self-interest in a business transaction involve either a director appearing on both sides of a transaction or a director receiving a personal benefit from a transaction not received by the shareholders.
In this case, the Court held the plaintiffs failed to allege sufficient facts to show that Dimon was self-interested in the merger. There was no evidence that Dimon appeared on both sides of the merger between Bank One and Chase or that he received a personal benefit not shared by the shareholders. While plaintiffs alleged that Dimon’s negotiations to retain his CEO position at the proposed merged company constituted self-dealing, Delaware law has routinely rejected the notion that a director’s interest in maintaining his office is a debilitating factor unless there is proof that the director believed he or she was vulnerable to being removed. In addition, the record showed that the terms of the merger agreement were disclosed in the joint proxy statement. The merger agreement, which was approved by the Board and shareholders, disclosed Dimon’s succession to become CEO.
Plaintiffs cited case law in support of their argument that “proof of [Dimon’s] undisclosed self-dealing, in itself, is sufficient to rebut the . . . business judgment rule and invoke entire fairness review.” The Delaware court rejected that argument, finding that there were no allegations in this case that Dimon was on both sides of the merger.
Board members and corporate officers should not hesitate to contact us if they ever have a question about a potential conflict of interest in any proposed business transaction that might result in a violation of their duty of loyalty.