In Bezirdjian v. O’Reilly, the plaintiff (Bezirdjian) files a shareholder derivative complaint on behalf of Chevron Corporation citing that current and certain former member of Board of Directors (BOD) breached fiduciary duties, grossly managed the corporation, were involved in constructive fraud, and wasted corporate assets “in connection with illicit payments Chevron allegedly made to Saddam Hussein in exchange for Iraqi oil from 2000 to 2003.”
Bezirdjian has a legal right to bring an action against the alleged party because he believes that harm has been done to Chevron in connection to illicit payments made to Saddam Hussein but the corporation itself has not taken any action against the offenders.
The Court applied the Delaware law since “Chevron is incorporated in the state of Delaware, and both parties agree that Delaware law applies this lawsuit.” The Court reasoned that under the General Corporation Law of the State of Delaware the BOD, rather than shareholders, manages the affairs of the corporations, and the decision to bring a suit resides with the corporate management that is subject to the business judgment rule.
The Court then relies on the business judgment rule to review the board’s refusal to pursue litigation against Directors other than in an effort to protect them.
Business judgment rule creates a presumption that in making sound decision, which does not involve self-interest, the BOD acts on an informed basis, in good faith and in the honest belief that its decisions are in the corporation’s best interests. Under the Deontological theory, some would argue that the appointment of the special litigation committee by BOD to investigate shareholder complaint rarely results in the Board bringing a lawsuit against directors.
Questions might arise, such as, “Why were these directors appointed to the special litigation committee and why others were not appointed?” “Why was this method used to appoint directors to the committee and not that method?” and on and on.
Some would argue that the reason why Boards rarely bring lawsuit against directors is because the committee created to investigate the issue against their fellow members might not do their due diligence because of conflict of interest, and therefore the final findings of the special litigation committee should not hold any merit. The investigation process was tainted from the beginning because the committee lacked impartiality to investigate the case. Thus, it is generally believed (by some) that committee designed (by the Board) to investigate shareholder complaints (against the Board) rarely result in a Board bringing a lawsuit against directors. However, that is not always the case.
When Bezirdjian made a demand on Chevron with respect to the derivative suit against some directors, the most fundamental requirement was that the special litigation committee be composed of directors who are independent and disinterested parties with respect to the matter at issue because this committee owes a fiduciary duty to Chevron. Hence, in this suit “the three Board members who comprised the Committee were appointed to the board after the alleged wrongful conduct had occurred.” Otherwise, they would have been deemed to have a conflict of interest when considering pursuing claims against their fellow directors with whom they serve on the board of the corporation.
Outsiders might argue that the special litigation committee did not do their due diligence and neglected their duty of care and duty of loyalty to the corporation when pursuing the investigation. Thus, the duty of care would require the fiduciaries (committee) to make informed and reasonable decision regarding the complaint against the board. The duty of loyalty requires the fiduciaries to act in good faith and in what they believe to be the best interest of Chevron in lieu of their personal interest. Even if the committee finds enough evidence to support the complaint filed by Bezirdjian, the Board must bring the lawsuit against the alleged directors.
If the committee does not pursue the investigation with impartiality and independence, the committee might be open to attacks regarding its objectivity in dealing with the directors under investigation and then they may not be protected under the business judgment rule. If this is the case, the court can reject the committee’s findings because the committee from the beginning was not truly independent and disinterested.
Chevron’s decision not to pursue litigation against some directors was within the business judgment rule. As mentioned in the case “the three Board members who comprised the Committee were appointed to the board after the alleged wrongful conduct had occurred.” These facts were sufficient for Chevron to establish that the Board, acting through the committee, made informed and reasonable decision (duty of care) and acted in good faith and in what they believe to be in the best interest of Chevron (duty of loyalty) to stop further pursuit of the matter in question and seek dismissal of the action, thus activating the presumption of the business judgment rule.
The Court concluded that the discovery of the corporate books would not be allowed, even though such information might have provided facts to support the claim whether the committee’s actions were disinterested, diligent, or in good faith. Instead, the plaintiff must obtain this information by using the “tools at hand.”
These tools at hand are generally available under state law for shareholders to request that their corporations provide them with certain types of corporate records which the committee relied upon in reaching its conclusion. The argument that could be made against this decision is as follows: Imagine that in the future a story is leaked in which it is revealed that the committee members indeed were neither impartial nor independent in reaching their conclusion in the matter. The committee was designed to bring about a favorable result against the alleged directors in the suit.
This would have a negative effect on Chevron’s reputation. If the Board can taint the committee to bring about a favorable conclusion to protect their “arrears,” are they involved in any other unethical behavior that we don’t know about and that could potentially damage Chevron? The stakeholders would lose trust in the Board’s ability to perform their duty of care and duty of loyalty in regard to Chevron’s best interest. Thus, the privilege of being a shareholder of Chevron gives that shareholder the right to examine the books and records of Chevron. The BOD and the management are the agents of the stockholders (principal), who are the primary owners of Chevron.
Allowing the shareholders to inspect the book may reveal whether the Board and the management are doing their due diligence in managing the business and affairs of the corporation. Also, this will give the shareholders the ability to vote intelligently on management and corporate policies. Chevron exists as a separate legal entity, but the stockholders are deemed the real beneficiaries. If the principals are not entitled to the information, how can they determine if the agents are, in fact, acting in the best interest of the principal?
On the other hand, Delaware law states that “discovery of evidence pertaining to a corporations’ decision to refuse to pursue a lawsuit is generally not available. Not allowing access to inspect the corporate books will protect the interests of all that are concerned. The right to inspect the books should not be granted for speculation purposes or to satisfy someone’s curiosity.
From the above, the analysis shows that Chevron may have legally done the right thing and was protected under the business judgment rule which may have been based on utilitarianism considering the benefits of those involved with Chevron. On the other hand, Chevron failed on the grounds of virtue, honesty, and truth (Kant, Aristotle). From an ethical perspective, business judgment rule may impose greater burden on the plaintiff and on the defendant. Chevron’s burden was just to allege facts to launch the business judgment presumption. On the other hand, Bezirdjian had to rebut the presumption with “particularity facts.”
Even if the allegation against Chevron were true, the case was dismissed based on the business judgment rule since Bezirdjian failed to rebut the presumption. From deontological point of view, Chevron hid the facts from the public at large which does not show respect or dignity to the shareholders and/or stakeholders. The shareholder did not act out of ego but out of virtue (Aristotle) given the evidence presented in the NYT article and the way Chevron tried to go about just barely proving the reasons not to disclose the books
. From a social relativism point of view, the board may have elected the special committee to protect their wrongdoings (of the few) and get the verdict in their favor. Following the letter of the law is the minimum requirement. Chevron should have done the right thing not just the legal thing.