Southeastern Pennsylvania Transportation Authority v. Volgenau: Eliminating the Fiduciary Obligation of Fairness (Special Committees and the Influence of Controlling Shareholders) (Part 5)
We are discussing Southeastern Pennsylvania Transportation Authority v. Volgenau.
The application of the business judgment rule depended upon the use of the independent special committee and the approval of the shares not beneficially owned by the controlling shareholder. In forming the special committee, the goal was to implement a process that essentially eliminated the influence of the controlling shareholder.
The opinion, however, noted that the controlling shareholder potentially played a role in the selection of the directors on the committee. As the opinion stated:
- There is some dispute whether the Special Committee members volunteered or whether they were selected by Volgenau. Grafton testified that “Dr. Volgenau proposed the committee members and the chair and gave each director an opportunity to comment . . . .” He later clarified: "I think that Mr. Klein, Mr. Gilburne, Mr. Barter and myself were proposed by Dr. Volgenau. There was a discussion then of the committee. I think Dr. Volgenau at that point asked the other board members whether any wanted to be on the committee. . ." General Ellis asked to be on the committee, and Ms. Wilensky and Mr. Keevan did not volunteer. Id.
The opinion found that the selection of a "majority of the committee's members was not 'the best practice'" but nonetheless found that the practice was "not fatal to the independence of the Special Committee".
The fact that the court described the approach as not "the best practice" reflects a judicial understanding that this provides a potential avenue for controlling shareholder influence. Had the court decided that this was impermissible, future boards would have excluded the controlling shareholder from selecting these directors. This would have provided additional assurance of the integrity of the process used by special committees. But the court chose not to do so, avoiding an opportunity to ensure more meaningful process.
Primary materials on this case can be found at the DU Corporate Governance web site.