The MBNA Merger and Independent Directors

We have a post by a student, Chris Erskine, on the complaint filed by shareholders in connection with the merger between MBNA and Bank of America.  According to the complaint, the CEO of MBNA, Bruce Hammonds, negotiated the transaction and received "material payments and benefits" from the deal.  In other words, the transaction involved a conflict of interest and ought to have been examined under the duty of loyalty.  In approving the transaction according to the complaint, no special committee was formed.  While the complaint is silent, this suggests that Hammond and other insiders may have participated in the decision making process.  Moreover, in addition, a number of the directors had potential conflicts of interest, including working for law firms receiving payments from MBNA and children working for the company.

Whatever the merits of the case, the complaint illustrates a difficulty with Delaware law.  To the extent the allegations of a conflict of interest by the CEO and of directors subject to the CEO's control are sustained, the decision making process in connection with the merger was compromised, with the conflict part of the decision making process.  Such a transaction is logically not entitled to the presumption of the business judgment rule.  Yet Delaware courts take the position that as long as the transaction is approved by a majority of independent directors, the presumption applies. 

The business judgment rule arose as an overinclusive protection for directors who were acting in the best interest of shareholders.  It presupposes an absence of a conflict of interest.  The Delaware courts, without explanation, have effectively applied the business judgment rule to decisions laden with the potential for a conflict of interest.  Never really explained, it is in the end another example of an evisceration of meaningful fiduciary duties designed to protect shareholders.