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Boards and Special Committees: the role of Special Committees in dealing with the "entire fairness standard".

Article Excerpt
Any corporate transaction involving an existing or potential conflict of interest may become the subject of litigation initiated by minority shareholders. In such cases, directors may be called upon to prove that all aspects of the transaction were fair to the corporation and its shareholders. Directors may, however, be able to shift this burden of proof away from themselves and to the minority shareholders/plaintiffs if they have taken certain steps to ensure the fairness of the transaction. One important step is the establishment and use of a properly functioning Special Committee comprising independent and disinterested Board members empowered to negotiate the transaction.

A basic principle of corporate law is that the business and affairs of a corporation are managed by its board of directors. Courts have recognized that directors, acting on behalf of a corporation, have certain fiduciary duties to the corporation and its shareholders, including a duty of care and a duty of loyalty. In fulfilling these duties, directors must act "on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company." Where directors have done so, a court will not question the business judgment of the directors or...

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