Court Of Chancery Explains Standard of Review
This is a critical decision to understanding the standard of review that the Court of Chancery will apply to a board's actions in selling its company. The decision makes 3 important points. First, the Court explains how and when the enhanced scrutiny standard of review applies and what that standard's "reasonableness" test means. The decision's explanation that the "rational basis" test of the business judgment rule standard differs from the "reasonableness" test of enhanced scrutiny is particularly helpful. Second, the decision explains when conduct that is wrong under a reasonable basis test is not so bad as to avoid exculpation under the director exculpation statute. This clarifies how far the prior law went in limiting exculpation when the conduct at issue showed an "utter failure" to follow one's duties. Third, the decision points out that if the board is aware that disclosure materials are inaccurate, then it may not be exculpated because the failure to correct the errors goes beyond a simple duty of care violation.