Business and Corporate Section Monthly Article


The Business Judgment Rule: Protection from Honest Mistakes and for Good Faith Decisions

Introduction

California’s business judgment rule has two parts.  The first part is statutory and immunizes corporate directors from personal liability if they act in conformance with the standards established under Corporations Code sections 309 (profit corporations) and 7231 (nonprofit corporations).1

The second part of the business judgment rule, based on the common law, insulates from court intervention management decisions directors make in good faith in what the directors believe is the corporation’s best interest.2

The business judgment rule provides powerful protections for directors and their management decisions when directors faithfully comply with its requirements.  Generally, whether the business judgment rule applies is a fact driven issue that is decided on a case by case basis, and frequently on a decision by decision basis.3

As the cases discussed below will show, a director’s attention to detail in complying with the business judgment rule’s requirements and in documenting that compliance may be critical to a successful assertion of the business judgment rule.

Part 1: Protection Against Director Personal Liability

A director is not liable for a mistake in business judgment made in good faith and in what the director believed to be the best interests of the corporation.4  Sections 309 and 7231 establish virtually identical standards for application of the rule:

  1. The director must act in good faith and in a manner that the director believes to be in the best interests of the corporation and its shareholders;5
  2. The director must exercise such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances;6
  3. The director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data prepared or presented by:
    1. officers or employees of the corporation whom the director believes to be reliable and competent in the matters presented;7
    2. counsel, independent accountants, or other persons on matters the director believes to be within the person’s professional or expert competence;8 and
    3. a committee of the board on which the director does not serve on matters within the committee’s authority, where the director believes the committee merits confidence;9
  4. When a director relies on information from a committee, the director must do so in good faith, after reasonable inquiry when the circumstances call for it, and without knowledge that would cause the director’s reliance to be unwarranted.10

A director who complies with the above requirements shall have no liability based on an alleged failure to discharge his or her obligations as a director.11

“‘[T]he business judgment rule protects well-meaning directors who are misinformed, misguided, and honestly mistaken.’”12 The rule sets up a presumption that directors’ decisions are made in good faith.13

Biren v. Equal Emergency Medical Group, Inc.,14 illustrates how fact intensive the analysis can be regarding whether the business judgment rule shields a director from liability for a disputed decision.  In Biren, the plaintiff/cross defendant, who was a director, shareholder and the CFO of a small corporation that provided emergency room services to hospitals, terminated the corporation’s billing company and hired a new billing company without first obtaining shareholder approval, as required under the corporation’s management agreement.  Unfortunately, the new billing company also performed poorly, and the corporation ultimately terminated the new billing company after suffering $2 million in lost profits.  The corporation’s four other shareholders, who were also directors and officers of the corporation, voted to remove the plaintiff/cross defendant as an officer and director and to redeem her shares at book value based on, among other things, her failure to obtain shareholder approval before hiring the second billing company.  The ousted director filed an action against the corporation and the other shareholders for breach of fiduciary duty, breach of contract and declaratory relief, and the corporation cross-complained for breach of contract, breach of fiduciary duty, negligence and declaratory relief.  The case proceeded to a bench trial.

The trial court found that the plaintiff/cross-defendant breached the corporation’s management agreement when she terminated the first billing company and hired a new billing company, without first obtaining shareholder approval.15  The trial court also found, however, that the director did not breach her fiduciary duty to the corporation because she reasonably relied on sources of information she  believed were reliable when deciding to switch billing companies.16   Before she terminated the first billing company, the director had discussions with two of the billing company’s employees who told her that the company had completely stopped processing the corporation’s bills and that the billing company had suffered a mass exodus of employees due to management problems, and before she hired the new billing company, the director consulted with a physician who was experiencing similar billing problems and who gave her a positive reference for the new billing company.17  The director believed that the corporation was in an emergency situation because its bills were not being processed and that it was her fiduciary duty to make a quick decision to maintain the corporation’s financial stability.18  The director explained that she did not obtain prior shareholder approval and acted alone because the other directors were either on vacation or otherwise unavailable.19

The appellate court affirmed the trial court’s ruling that the director did not breach her fiduciary duty based on the business judgment rule.20   The appellate court noted that the trial court’s finding that the director “reasonably relied” on information she believed was correct was tantamount to a finding she acted in good faith.21  The appellate court rejected the corporation’s argument that, even assuming the director acted in good faith, her failure to obtain board approval before hiring the new billing company prevented her from invoking the business judgment rule, emphasizing that “the business judgment rule protects well-meaning directors who are misinformed, misguided, and honestly mistaken.”22  The appellate court explained that the director’s failure to obtain board approval for the new billing contract did not by itself make the business judgment rule inapplicable because the rule protects directors “unless they knew their acts were illegal or they ‘knowingly committed acts outside the scope of their authority.’”23

The appellate court found that the trial court could reasonably infer that the director remained within the protections of the business judgment rule because the corporation did not prove her actions were anything more than an honest mistake.24  The appellate court recognized that, unlike large corporations that often have formal board meetings to approve contracts, small corporations conduct much of their business informally, and especially so where the members of the board personally conduct the corporation’s business.25  The court explained that the practice of allowing officers to approve contracts is so prevalent in some close corporations that they often bind the entity even though the officer should have obtained board approval.26  The appellate court noted that the corporation was run informally by physicians who themselves worked 12-hour shifts in hospital emergency rooms, and that unlike in large corporations, there were no distinct lines between management levels.27  The director was responsible for billing matters and she believed it was her duty to promptly change billing companies to protect the corporation.28  The appellate court explained that, although the director should have brought the matter to the other directors for approval, the trial court could reasonably infer that she mistakenly believed it was in the best interest of the corporation that she act quickly because the other directors could not.29

The appellate court also noted that there was no evidence that the director was guilty of self-dealing, illegality, or abdication of her corporate responsibilities.30  The appellate court rejected the corporation’s assertion that the director “closed her eyes” to the conduct of the business of the corporation, finding, to the contrary, that her “eyes were wide open to a financial crisis she tried to resolve.”31

Biren provides an excellent example of courts pragmatically evaluating whether a director is entitled to protection under the business judgment rule and the types of factors that weigh in favor of applying the rule.

On the other end of the spectrum, Gaillard v. Natomas Co.,32 illustrates conduct that may disqualify a director from the business judgment rule’s protections.  Gaillard concerned a shareholder derivative action that challenged “golden parachutes” and other benefits provided to five inside directors of a corporation, who were also the corporation’s five principal officers, as part of a friendly merger agreement reached after receipt of a hostile tender offer to acquire the corporation.  The five inside directors devised lucrative termination agreements, totaling $11 million in compensation, which the company’s outside counsel presented to a compensation committee comprised of five of the company’s twelve outside directors, claiming that the termination agreements were conducive to management continuity.  The compensation committee also discussed, and ultimately recommended, a consulting agreement for one of the directors, who would become president of a spin-off entity after the merger, that would provide the director with $250,000 a year in consulting fees for four years after the date of the merger.  During the four year consulting period, the director could engage in any other business on a full-time basis and still receive the $250,000 annual compensation.

The compensation committee agreed to recommend approval of  the termination agreements, in reliance on outside counsel’s presentation, and approval of the consulting agreement.  The board of directors followed the compensation committee’s recommendation and approved the termination agreements and the consulting agreement, with the five inside directors present at the meeting, but abstaining.

Shortly after the merger was consummated, four of the key executives voluntarily terminated their employment and received collectively approximately $10 million in compensation under their termination agreements.  The director who received the consulting agreement received $250,000 annually for the full four year period, but devoted less than one full day during the four years to consulting services.

The shareholder derivative actions brought against all of the directors alleged that the adoption and implementation of the termination agreements and the consulting agreement constituted breach of fiduciary duty, waste and mismanagement, negligence, conversion and abdication of fiduciary duties.  The directors moved for summary judgment based on the business judgment rule, and the trial court granted their motion.33

The appellate court reversed the summary judgment ruling as to everything except the trial court’s finding that the business judgment rule protected the outside directors regarding their recommendation and approval of the consulting agreement.34

When analyzing whether the business judgment rule applied, the appellate court separately reviewed the conduct of the inside directors, the five outside directors on the compensation committee and the remaining outside directors who relied on the committee’s recommendation to approve the agreements.

The appellate court found that because the five inside directors abstained from voting on whether to approve the termination agreements and the consulting agreement, they could not be liable for approving the agreements.35   However, the appellate court explained, the inside directors were not entitled to the protection of the business judgment rule, which only protects directors, because they sought approval of the agreements in their capacities as officer employees of the corporation.36  The appellate court found that there were questions of fact that could not be resolved as a matter of law based on the record as to whether the directors breached their fiduciary duties to the corporation and were liable for waste based on seeking the agreements.37

The appellate court also found that there were questions of fact regarding whether the five outside directors on the compensation committee either justifiably relied on outside counsel’s presentation to recommend approval of the termination agreements, or whether the outside directors should have made further reasonable inquiry under the circumstances.38  Outside counsel did not explain how the termination agreements would promote continuity of management, and the record did not reflect that the committee members asked counsel for further explanation regarding his conclusory opinion, or performed their own analysis. 39  The appellate court noted the committee considered the termination agreements for less than two hours before agreeing to recommend their approval, and rather than promote management continuity, the agreements would in fact encourage the executives to leave the company shortly after the merger.40  Two of the inside directors already had golden parachutes in their existing employment agreements, which the committee members should have known, and the record provided no explanation for why these two directors needed to make their benefits more “golden.”41

Further, the appellate court found that the compensation committee members should have known that the golden parachutes would be considered excessive under pending tax legislation, and that the director who was the chairman of the board and chief executive officer had directed outside counsel to prepare the termination agreements, which raised an inference of self-dealing that the committee members should have further investigated.42

The appellate court explained that a trier of fact might conclude that the committee’s reliance on outside counsel with no further inquiry was reasonable, it could also reasonably find that the committee should have, at the very least, independently reviewed the terms of the golden parachutes to consider whether they served a valid use of corporate funds or constituted executive overreaching.43

The appellate court reached a different conclusion regarding the compensation committee’s recommendation to approve the consulting agreement because the committee itself raised  the idea of a consulting agreement and found that it would serve a valid and necessary purpose.44  The appellate court explained that whether the director ultimately rendered $250,000 worth of consulting services per year was irrelevant to whether the business judgment rule applied to the committee’s decision to recommend approval of the consulting agreement.45

Finally, the appellate court explained that the outside directors who were not on the compensation committee were allowed to rely on the committee’s recommendations, which they believed “to merit confidence” and were not required to initiate their own independent investigation.46  The appellate court found, however, that there was a triable issue of fact regarding whether the outside directors who were not on the committee should have done some further inquiry because of the nature of the particular golden parachutes and the timing of their proposal.47  At the time of the merger, golden parachutes were highly controversial, and the outside directors, who presumably were appointed to the board because of their business and financial acumen, likely had, or should have had, some knowledge of this controversy.48  The appellate court explained that in most cases, directors should be allowed to rely largely on the recommendations of a board committee as to matters delegated to that committee, but there was a triable issue regarding whether the outside directors’ general knowledge of the questionable nature of golden parachutes within the context of takeovers would cause such total reliance to be unwarrented.49

Gaillard demonstrates that directors, boards and committees must scrupulously develop and evaluate the record regarding their reasoning and the basis for their decisions to insure compliance with and application of the business judgment rule.  “Notwithstanding the deference to a director’s business judgment, the rule does not immunize a director from liability in the case of his or her abdication of corporate responsibilities: When courts say that they will not interfere in matters of business judgment, it is presupposed that judgment – reasonable diligence – has in fact been exercised.”50  The Gaillard court repeatedly noted that the directors’ actions might be entitled to protection under the business judgment rule, but the record was too flimsy for the court to make that determination as a matter of law.  In the one instance where the compensation committee documented that it conceived of, evaluated and determined that the consulting agreement would serve the best interests of the corporation, the appellate court found that the business judgment rule applied, regardless of whether the compensation the corporation ultimately paid under the agreement appeared to favor the corporation.51  Under the business judgment rule,“[t]he board of directors may make incorrect decisions, as well as correct ones, so long as it is faithful to the corporation and uses its best business judgment.”52 

Part 2: Protection for Corporate Management Decisions

The business judgment rule protects a board of directors’ appropriate exercise of discretion.53  The premise behind the rule is that directors, not courts, are best able to judge whether a particular act or transaction is helpful to the conduct of the corporation’s affairs or expedient for the attainment of its purposes.54  “The rule requires judicial deference to the business judgment of corporate directors so long as there is no fraud or breach of trust, and no conflict of interest.”55  “Thus, ‘when the rule’s requirements are met, a court will not substitute its judgment for that of the corporation’s board of directors.’”56

“In most cases, ‘the presumption created by the business judgment rule can be rebutted only by affirmative allegations of facts which, if proven, would establish fraud, bad faith, overreaching or an unreasonable failure to investigate material facts.’”57  Conclusory allegations of improper motives and conflicts of interest are insufficient to overcome the presumption that the board of directors acted in good faith.58  Likewise, a plaintiff cannot overcome the presumption by merely alleging a failure to conduct an active investigation without also alleging the facts that would reasonably call for the investigation, or facts that would have been discovered by a reasonable investigation and would have been material to the questioned exercise of judgment.59

Whether a plaintiff has alleged sufficient facts to rebut the business judgment rule or establish its exceptions is a question of law that may be raised on demurrer.60

Even when a shareholders derivative action sufficiently alleges wrongdoing on the part of a majority of directors, the board of directors of the corporation may appoint a special litigation committee of independent directors to investigate the challenged transaction.61  If the litigation committee determines in good faith that it is not in the interests of the corporation to prosecute the lawsuit, then the derivative claim must be dismissed.62  California, and many other jurisdictions, recognize this procedure as the special litigation committee defense. 63

 “[T]he defense is intended to further the fundamental principle that those best suited to make decisions for a corporation – including the decision to file suit on its behalf – are its directors, not its stockholders or the courts.64  “Directors have the same discretion with respect to the prosecution of claims on behalf of the corporation as they have in other business matters.”65

To establish the special litigation committee defense, the corporation must prove, either upon a summary judgment motion or at trial, that the committee members were disinterested and that they conducted an adequate investigation.66  The trier of fact does not evaluate the substance of the derivative claim as an element of the defense.67

When determining whether the members of a special litigation committee were independent, the court must determine whether each member was “in a position to base his decision on the merits of the issue rather than being governed by extraneous considerations or influences.”68  In the second step of the analysis, the court must determine whether the procedures the committee followed were adequate or whether they were so inadequate as to suggest fraud or bad faith.69  “It is necessary for the court to consider whether, on the facts alleged, the refusal of the directors to prosecute the claims was so clearly against the interests of the corporation that it must be concluded that the decision of the directors did not represent their honest and independent judgment.”70

“When the special litigation committee defense reaches the trial court on summary judgment, traditional summary judgment rules apply.”71  However, the issues to be decided in the summary judgment motion are not those framed by the pleadings, but rather, the elements of the defense.72  “Neither the merits of the derivative claim nor the substance of the committee’s decision to reject the claim is subject to review at this stage.” 73  The trial court must determine, as a matter of fact, whether the committee members were disinterested and whether they conducted an adequate investigation.74  “If [a trial court] answers yes to both questions, it must dismiss the derivative action.”75  On the other hand, “if a trial court detects a factual dispute concerning the independence of the special litigation committee or the adequacy of its investigation, the case may not be dismissed short of trial.”76

Desaigoudar v Meyercord,77 provides excellent examples of both measures a board may take to establish an independent special litigation committee and committee investigative procedures that have withstood court scrutiny. 

In Desaigoudar, the plaintiffs, in there capacity as trustees of a foundation that was the majority shareholder of the corporation, brought a derivative action against six members of the corporation’s board of directors, the corporation’s CEO and the corporation’s in-house counsel for waste of corporate assets because the defendants caused the corporation to unwind an investment in a start-up company that was later acquired in a stock-for-stock transaction valued at over $37 million.  If the corporation had maintained its investment, it would have held a 56 percent interest in the start-up company that would have been worth around $20 million after the acquisition.  Instead, as part of the agreement to unwind the investment, the corporation held a stock purchase warrant that it exercised after the acquisition for a return of $1.6 million.

One of the plaintiffs was the founder, former CEO and former Chairman of the Board of the corporation.  During his tenure as CEO and Chairman, he had brought the investment opportunity to the corporation.  Shortly after the corporation made the investment, it became embroiled in accusations of accounting irregularities.  The plaintiff was implicated in the accounting irregularities, and the board of directors relieved him of his positions with the company and hired a new CEO.

The company’s stock price plummeted 40 percent because of the accounting controversies, and the new CEO, with the board’s approval, terminated several projects, including the investment in the start-up company, in an effort to help the company survive the serious business and financial crisis it was suffering.

The plaintiffs alleged that the defendants failed to investigate the value of the start-up company before causing the corporation to dispose of its investment and that the defendants had concealed or misrepresented to the shareholders that they had disposed of corporate assets for less than fair market value to increase earnings for the quarter, and thereby secure shareholder approval of stock options for themselves.

The board of directors appointed a special litigation committee of two directors who had joined the board after the alleged wrongdoing.  The board tasked the committee with assessing the merits of plaintiffs’ claims and authorized it to take whatever action it deemed necessary on behalf of the corporation.  Plaintiffs attempted to take discovery, and the corporation moved for and secured a stay of the derivative action pending completion of the committee’s report.

At the conclusion of its investigation, the committee produced a detailed report in which it concluded that the various decisions concerning the corporation’s termination of its investment and other projects were valid exercises of business judgment based on multiple valid business purposes, including the need to conserve cash at a time when the corporation’s financial resources were limited, the need to focus resources on the corporation’s core business, and the need to reduce management and resource diversion.  The committee found no credible evidence of self-dealing by any of the individual defendants and determined that the plaintiffs’ stock option allegations were economically irrational.  The committee concluded that the derivative suit would be unlikely to succeed, unlikely to result in any monetary recovery to the corporation, and was wholly opposed to the best interests of the corporation.

The corporation and the individual defendants moved for summary judgment based on the special litigation committee defense.  The trial court granted the motion based on its finding that the plaintiffs failed to present evidence sufficient to raise a triable issue of fact regarding the special litigation committee’s independence or the adequacy of its investigation.  The trial court also denied plaintiffs’ request for a continuance to obtain discovery.  Plaintiffs appealed.

On appeal, plaintiffs argued that: 1. the trial court was required to consider the merits of their derivative claims when considering the motion for summary judgment; 2. the trial court erred by granting the summary judgment motion even though the derivative lawsuit and all discovery had been stayed; and 3. the trial court erred when it found that there was no question of fact warranting a trial on the merits.78

The appellate court affirmed the summary judgment.  In response to the plaintiffs’ first contention, the appellate court performed a detailed analysis of the special litigation committee defense and confirmed that, when evaluating a summary judgment motion, the trial court should consider only whether there is a factual dispute concerning the independence of the special litigation committee members or the adequacy of their investigation.79  Accordingly, the appellate court held that the trial court did not err in failing to consider the merits of plaintiffs’ derivative claims.80

The appellate court conceded that the plaintiffs’ argument regarding discovery had appeal, in the abstract, but rejected the argument based on the facts.81  Although plaintiffs had unsuccessfully attempted to conduct discovery regarding their substantive claims,82 they never sought discovery, either formally or informally, regarding the only two matters at issue in the summary judgment motion, the independence of the committee members or the adequacy of their investigation.83  The appellate court noted that plaintiffs did not submit an affidavit regarding the possibility that facts essential to their opposition might exist or explaining their reasons for not having evidence to support their opposition.84   Plaintiffs’ counsel did not even mention the discovery issue or request a continuance during the hearing on the summary judgment motion.85

The appellate court also noted that the trial court had stayed the proceedings “pending the investigation report by the special litigation committee,” and therefore, the stay expired by its own terms once the committee issued its report.86  At that point, the committee’s independence and good faith became relevant and plaintiffs could have sought the discovery they needed.  The appellate court emphasized that, even if the parties considered the stay to still be in effect after the committee issued its report, plaintiffs could have sought relief from the stay to conduct pertinent discovery.87

Based on these facts, the appellate court found that plaintiffs did not, and through their own fault, could not provide the trial court with a declaration to support their request for a continuance, and therefore, the trial court did not abuse its discretion in granting the summary judgment motion over plaintiffs’ objection that they had not been permitted discovery. 88

The appellate court next turned to the substance of the defendants’ motion and the plaintiffs’ opposition.  The appellate court found that the defendants met their burden of producing evidence to establish the independence of the committee and the appropriateness of its investigation based on the following facts:

  1. The two directors appointed to the special litigation committee joined the board of directors after the events alleged in the complaint, had never previously served as directors of the corporation, and were never officers or employees of the corporation;
  2. One of the independent directors was a certified public accountant with experience in the management of publicly held companies, and the other was a retired executive vice-president of an unrelated company who was trained as anelectrical engineer;
  3. The special litigation committee retained Brobeck, Phleger & Harrison, LLP, as its separate counsel.  The Brobeck firm had never represented the corporation or any of the individual defendants named in the derivative action;
  4. For approximately ten months, the committee and its counsel investigated the allegations in the derivative action and other matters raised by the plaintiffs.  The committee met with its counsel 13 times, it reviewed 25,000 pages of relevant documents from the parties and public sources, it interviewed 18 witnesses, including all of the defendants, and it attempted to interview the lead plaintiff, but was unable to do so;
  5. The independent directors and the committee’s counsel submitted declarations in support of the summary judgment motion that detailed their investigative procedures.  The independent directors also declared that they had no personal interest in the outcome of the litigation, no significant business dealings with any of the defendants, the company, or its executive management, and no significant social contacts with the defendants or the company’s executive management; and
  6. The committee presented a 103-page report, including exhibits, that expanded upon the details of its investigation and described its finding that the disputed transactions were valid exercises of business judgment based on multiple valid business purposes.89

The appellate court found the plaintiffs’ opposition was both procedurally and substantively deficient.90  Plaintiffs’ separate statement cited no evidence and the declarations they submitted did not address the relevant issues.91

In their separate statement, plaintiffs generally disputed the defendants’ material facts on the grounds that they had not had an opportunity to conduct discovery.92   They objected to certain facts by arguing that the directors on the special litigation committee were not disinterested, and they attempted to controvert the assertion that Brobeck had never represented any of the individual defendants or the corporation by claiming that Brobeck had previously represented an employee of the corporation; however, plaintiffs did not cite any evidence in support of their assertions.93

Plaintiffs argued in their memorandum of points and authorities that the committee was not disinterested, that Brobeck was not independent, and that the investigation was not adequate.94  They relied upon declarations from the lead plaintiff and the founder of the start-up company.   The lead plaintiff stated that an attorney from Brobeck had previously represented one of the corporation’s employees in federal litigation.  Other than that one assertion, both declarations discussed the merits of the derivative claim.96

The appellate court explained that the assertions concerning Brobeck did not raise a triable issue because  “independent” counsel means counsel who was not associated with the underlying transaction.97  Plaintiffs had presented no evidence that Brobeck was associated with terminating the corporation’s investment in the start-up company, and the fact that one partner from Brobeck previously represented one of the corporation’s employees did not impugn the independence of the firm regarding the subject matter of the investigation.98  The appellate court emphasized that the statements in the declarations concerning the derivative claims attacked the reasonableness of the committee’s conclusion that the litigation should not be pursued, and not the good faith of its investigation. 99 

The appellate court found that the plaintiffs made no evidentiary showing to support either their opposition to the motion or their request for a continuance, and therefore, the trial court did not err in granting the summary judgment motion.100

Desaigoudar provides a proverbial check list of court-approved measures a board and its designated litigation committee can follow to establish the special litigation committee defense.  Possibly the most important measure was that the litigation committee and the committee’s counsel in Desaigoudar appear to have meticulously documented the facts that proved their independence and the thoroughness of their investigation, which was key to the corporation’s successful assertion of the defense.

Conclusion

In layman’s terms, the business judgment rule is the legal system’s recognition that “no one is perfect” and that “you can’t please everyone.”  Directors will make honest mistakes and unpopular decisions.  If a director is giving his or her best effort to promote the best interests of the corporation, but the results of the director’s decision are regrettable or unpopular, the law is not going to punish or second guess the director.

The business judgment rule is a powerful protection that should afford honest, hard-working directors peace of mind.  The theme that runs through the cases discussed above is that those directors who took the time to document, or who could otherwise show, they made their best effort on behalf of the corporation enjoyed the protection of the business judgment rule, and those who were less careful, suffered the continued drudgery of protracted litigation.

– John J. Freni, Esq.

**This article is intended for informational purposes only and does not constitute legal advice. Any views expressed are those of the author only and not of the SDCBA or its Business & Corporate Law Section.**


 

1  Scheenstra v. Cal. Dairies, Inc., 213 Cal. App. 4th 370, 386-387 (2013).

2  Id. at 387.

3  See, Tenzer v. Superscope, Inc., 39 Cal. 3d 18, 32 (1985)(“Application of the standards of fairness and good faith required of a fiduciary is a factual question for the trier of fact not subject to independent review.”); Gaillard v. Natomas Co., 208 Cal. App. 3d 1250, 1267 (1989)(application of Corp. Code § 309 raises issues of fact which should generally be left to the trier of fact).

4   Barnes v. State Farm Mut. Auto Ins. Co., 16 Cal. App. 4th 365, 378 (1993); Cal. Corp. Code §§ 309 & 7231.

5  Because section 7231 applies to nonprofit corporations, the director need only serve the best interests of the corporation. See, Cal. Corp. Code §7231, subd. (a).

6  Cal. Corp. Code §§ 309, subd. (a) & 7231, subd. (a).

7  Cal. Corp. Code §§ 309, subd. (b)(1) & 7231, subd. (b)(1).

8  Cal. Corp. Code §§ 309, subd. (b)(2) & 7231, subd. (b)(2).

9  Cal. Corp. Code §§ 309, subd. (b)(3) & 7231, subd. (b)(3).

10  Id.

11  Cal. Corp. Code §§ 309, subd. (c) & 7231, subd. (c).

12  Biren v. Equal. Emergency Med. Group, Inc., 102 Cal. App. 4th 125, 137 (2002)(quoting, FDIC. v. Castetter, 184 F. 3d 1040, 1046 (9th Cir. 1999)); Biren v. Equal Emergency Med. Group, Inc., 102 Cal. App. 4th 125, 136 (2002)(quoting, Lee v. Interinsurance Exchange, 50 Cal. App. 4th 694, 715 (1996)).

13  Id. at 136.

14  102 Cal. App. 4th 125 (2002).

15  Id. at 135.

16  Id.

17  Id. at 133-134.

18  Id. at 134.

19  Id.

20  Id. at 132, 136-138.

21  Id. at 136.

22  Id. at 136-137.

23  Id. at 137 (quoting, 3A Fletcher, Cyclopedia of the Law of Private Corporations (2001 supp.) § 444, pp. 368-369.)

24  Id.

25  Id.

26  Id.

27  Id.

28  Id. at 138.

29  Id.

30  Id.

31  Id.

32  208 Cal. App. 3d 1250 (1989), disapproved on other grounds in, Grosset v. Wenaas, 42 Cal. 4th 1100, 1119 n. 16 (2008).

33  Gaillard, supra, 208 Cal. App. 3d at 1256-1257.

34  Id. at 1274.

35  Id. at 1268.

36  Id.

37  Id.

38  Id. at 1269.

39  Id.

40  Id. at 1269-270.

41  Id. at 1270.

42  Id. at 1271.

43  Id.

44  Id.

45  Id.

46  Id.

47  Id.

48  Id. at 1272 (emphasis in original).

49  Id.

50  Id. at 1264.

51  Id. at 1271.

52  Findley v. Garrett, 109 Cal. App. 2d 166, 178 (1952)

53  See, Scheenstra, supra, 213 Cal. App. 4th at 388-389.

54  Id. at 387.

55  Desaigoudar v. Meyercord, 108 Cal. App. 4th 173, 183 (2003).

56  Scheenstra, supra, at 387 (quoting, Lamden v. La Jolla Shores Clubdominium Homeowners Ass’n., 21 Cal. 4th 249, 257 (1999).

57  Berg & Berg Enters., LLC v. Boyle, 178 Cal. App. 4th 1020, 1046 (2009)(quoting, Everest Investors 8 v. McNeil Partners, 114 Cal. App. 4th 411, 430 (2003))(hereinafter, Berg).

58  Id. at 1045.

59  Berg, supra, at 1045-1046.

60  Id. at 1046.

61  Desaigoudar, supra, 108 Cal. App. 4th at 184-185.

62  Id. at 184-185.

63  Id. at 185-186.

64  Id. at 186-187.

65  Id. at 184.

66  Id. at 185.

67  Id. at 187.

68  Id. at 189 (quoting Katz v. Chevron Corp., 22 Cal. App. 4th 1352, 1367 (1994)).

69  Id.

70  Id.

71  Id.

72  Id. at 190.

73  Id. at 179.

74  Id. at 185, 190

75  Id. at 185.

76  Id. at 190.

77  108 Cal. App. 4th 173 (2003).

78  Id. at 179.

79  Id. at 182-190,

80  Id. at 190.

81  Id.

82  Before the trial court imposed the stay, plaintiffs served a set of form interrogatories on one of the individual defendants and noticed several depositions.  Id. at 181.  They had also sought relief from the stay to take the depositions of the plaintiff who was the former CEO of the corporation and the founder of the start-up company, but the trial court denied plaintiffs’ request.  Id. at 191.

83  Id. at 190-191.

84  Id. at 190.

85  Id.

86  Id. at 191.

87  Id.

88  Id.

89  Id. at 181, 192-194.

90  Id. at 195.

91  Id.

92  Id. at 194.

93  Id.

94  Id. at 194

95  Id.

96  Id.

97  Id.

98  Id.

99  Id.

100  Id. at 196.