The foundation of the fulfillment of the duty of care is reasonable reliance on informed expertise. The most common source of this expertise is the corporation’s executive team and, for especially challenging decision-making, combinations of outside advisors and consultants, usually together with the executive team. Importantly, “reasonable reliance” does not mean delegation of judgment and decision-making.

Toward the end of board meetings, directors often ask me a question that goes to the heart of where “reasonable reliance” ends and “delegation” begins: The directors ask whether they will be complying with their fiduciary duties by making a contemplated decision about an important strategic matter. In the absence of any director conflicts or other loyalty issues, the answer typically derives not from whether I think the decision will be better than the alternatives for advancing the best interests of the corporation and its stockholders – who am I, a mere lawyer, to know what’s best – but from whether both (a) there is a foundation in the record to support the determination and (b) the board has received sufficient information and been sufficiently engaged to enable the directors to understand this foundation and determine in good faith that their reliance on the foundation would be reasonable.

For example, if a reputable investment bank has reported to the board of a target company that the all-cash price that a proposed buyer of the company is willing to pay is the highest purchase price available after the market check conducted by the bank, together with the bank’s opinion that the price is fair from a financial point of view, but the board was neither engaged in nor understands the scope of the market check and dynamics of the sale process, and the board has not received the financial analyses and related inputs and assumptions that serve as the bases for the opinion, then this board will be in serious danger of veering away from “reasonable reliance” and into “delegation” territory.

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