The Management Friendly Nature of the Delaware Courts: Teamsters Union 25 Health Services & Insurance v. Orbitz (Part 6)

We are discussing Teamsters Union 25 Health Services & Insurance v. Orbitz.  

Plaintiffs sought to show demand excusal by alleging that the applicable standard of review was entire fairness since the shareholder alleged to have a controlling interest "stood on both sides" of the transaction. Although finding that the argument had "superficial appeal," the court concluded that the approach was "inconsistent with controlling authority in my opinion." 

"Controlling authority" to defeat this "superficial appeal" was Aronson and Beam, neither of which actually addressed the issue.  Moreover, given the common nature of claims for breach of duty of loyalty, it was telling that the court was unable to find any real "controlling authority" in the three decades worth of decisions issued in the aftermath of Aronson.  

Moreover, the court's analysis -- that the only basis for showing demand excusal was to allege reasonable doubt as to the impartiality of a majority of the board -- was actually inconsistent with the two prong analysis in Aronson.    

Aronson allowed for demand excusal whenever there was reasonable doubt about board independence. Aronson also allowed for demand excusal where the decision of the independent board was not "the product of a valid exercise of business judgment" that will no longer be the case. Shareholders unable to show a lack of independence are, however, unlikely to be able to show a lack of impartiality. Thus, independence will effectively defeat both prongs, eliminating the second prong of the test.      

There is nothing unusual about the Orbitz case.  It is a logical outgrowth of the direction that the Delaware courts have been taking for the last couple of decades.  While the court incorrectly interpreted a number of legal doctrines (including the analysis in Aronson), the analysis may correctly anticipate the willingness of the Delaware Supreme Court to alter existing standards in a more management friendly manner.