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The Harvard Corporate Governance Blog, December 13, 2008 posting


The Financial Crisis and the Business Judgment Rule

Posted by Robert J. Giuffra, Jr., Sullivan & Cromwell LLP, on Saturday December 13, 2008 at 12:49 pm

(Editor’s Note: Sullivan & Cromwell LLP advised the boards of both Bear Stearns and Wachovia in the transactions discussed in this post. This Blog recently published a post, available here, about the JPMorgan/ Bear Stearns decision. Today’s post analyzes this decision as well as the similar decision by the North Carolina Superior Court arising from the Wachovia/ Wells Fargo merger.)

My firm has issued a memorandum that discussed the recent judicial decisions arising from the mergers of JPMorgan and Bear Stearns in March and of Wells Fargo and Wachovia in October. The two decisions — In re Bear Stearns Litigation, No. 600780/08 and Ehrenhaus v. Baker et al., No. 08 CVS 22632 — offer the first indication of how courts will evaluate board decisions made in response to the extraordinary conditions created by the ongoing financial crisis. Both opinions stand as strong endorsements of the protections offered by the business judgment rule for directors who act diligently and in good faith in making major corporate control decisions during this crisis. Their holdings have several important implications:

• First, these cases suggest that courts are cognizant of the extreme conditions created by the financial crisis, and will take into account the overwhelming financial, governmental, and time pressures boards of directors are facing when evaluating whether board decisions are entitled to the protections of the business judgment rule.

• Second, these cases suggest that courts are aware of the uncertainties created by regulatory and legislative responses to the financial crisis, and that courts will not fault boards for failing accurately to predict these governmental responses.

• Third, despite the broad deference these courts have given board decisions made in response to the financial crisis, the Wachovia decision suggests that courts still may be willing to invalidate or enjoin provisions – such as the 18-month bar on redeeming Wells Fargo’s preferred shares – that the court believes will prevent boards from fulfilling their fiduciary duties.

The memorandum is available here.



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