Kahn v. Sullivan
594 A.2d 48 (1991)
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Rule of Law:
A corporate charitable donation does not constitute waste if it is reasonable in light of the corporation's financial circumstances, and a court's approval of a settlement resolving a challenge to such a donation will be upheld on appeal unless it constitutes an abuse of discretion.
Facts:
- Dr. Armand Hammer, the CEO and board chairman of Occidental Petroleum Corporation (“Occidental”), owned a personal art collection valued at $300-$400 million.
- For many years, Occidental financially sponsored exhibitions of Dr. Hammer's collection, believing the publicity generated goodwill for the company, particularly in areas where it conducted business.
- After negotiations to permanently house the collection at the Los Angeles County Museum of Art (LACMA) failed, Dr. Hammer proposed in 1988 that Occidental build a new museum adjacent to its corporate headquarters for the collection.
- Occidental’s Board of Directors formed a Special Committee comprised of eight independent, outside directors to evaluate the museum proposal.
- The Special Committee was provided with extensive analyses from legal and accounting firms, including a 96-page memorandum from the Dilworth law firm, before meeting to consider the proposal.
- On February 16, 1989, the Special Committee unanimously approved the proposal, committing Occidental to spend approximately $50 million on construction and purchase a $35.6 million annuity to fund the museum's operations.
- In exchange for Occidental's funding, Dr. Hammer and his foundation agreed to transfer the entire art collection to the new museum, which would be named for him and provide public recognition to Occidental.
Procedural Posture:
- Shareholders Joseph Sullivan, Alan Brody, Alan R. Kahn, and Barnett Stepak filed three separate shareholder class and derivative actions in the Delaware Court of Chancery against Occidental's directors.
- The plaintiffs in the Sullivan action entered into a settlement agreement with Occidental, which was approved by the Special Committee.
- Kahn and other shareholders (the Objectors) moved for a preliminary injunction in the Court of Chancery to block the settlement, which the court denied.
- The settling parties presented the final settlement agreement to the Court of Chancery for approval.
- The Objectors, including Kahn, Stepak, and the California Public Employees Retirement System (CalPERS), appeared at a settlement hearing to argue against the settlement's approval.
- The Court of Chancery issued a memorandum opinion finding the settlement to be fair and reasonable and entered an order approving it.
- The Objectors (appellants) appealed the Court of Chancery’s order approving the settlement to the Supreme Court of Delaware.
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Issue:
Did the Court of Chancery abuse its discretion by approving a settlement of a shareholder derivative suit that challenged a board's decision to make a large charitable donation to fund an art museum?
Opinions:
Majority - Holland, Justice
No, the Court of Chancery did not abuse its discretion in approving the settlement. An appellate court's review of a settlement approval is highly deferential and limited to determining whether the lower court abused its discretion, not re-evaluating the settlement's intrinsic fairness. The Court of Chancery correctly found that the shareholder plaintiffs' claims were weak and their potential for success was very poor. First, the Special Committee's decision was likely protected by the business judgment rule because it was composed of independent directors who acted on an informed basis after receiving extensive advice from legal and financial experts. Second, the shareholder's claim of corporate waste was unlikely to succeed because the donation was reasonable under the test established in Theodora Holding Corp. v. Henderson. Given Occidental's immense size, assets, and revenues, the expenditure was not so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration. Because the underlying claims were weak, the Court of Chancery correctly concluded that the 'meager' but adequate benefits of the settlement were fair and reasonable under the circumstances, and its decision was the product of an orderly and logical deductive process.
Analysis:
This case reinforces the significant deference appellate courts give to the Court of Chancery in approving shareholder litigation settlements, cementing the 'abuse of discretion' standard of review. It provides a modern application of the corporate waste doctrine to charitable giving, affirming that even a very large donation primarily benefiting a CEO's legacy can withstand a waste challenge if it provides some ancillary benefit, such as goodwill, and is deemed 'reasonable' in proportion to the company's vast resources. The opinion also serves as a guide for corporate boards on how to insulate a controversial decision from attack, highlighting the value of using a special committee of independent directors who are fully informed by outside experts.
