## Facts

- Occidental Petroleum’s board, acting through a special committee of independent outside directors, approved a large charitable donation to construct and fund an art museum bearing the name of its CEO and chairman, Dr. Armand Hammer.
- Because the transaction conferred reputational benefits on Hammer, shareholders alleged conflicts of interest and challenged the donation as corporate waste and as lacking a valid corporate purpose.
- The board engaged two outside law firms and the company’s public accountants to evaluate the proposal.
- The board formed a special committee consisting of eight independent, disinterested outside directors to review the transaction.
- After consulting advisers and investigating, the special committee unanimously concluded the museum would benefit the corporation and approved the donation.
- Shareholders filed multiple related class and derivative suits challenging the donation.
- In one action, the shareholder plaintiffs negotiated a proposed settlement, authorized for the corporation by the special committee, subject to Court of Chancery approval.
- Shareholders who were plaintiffs in the other related actions appeared as objectors to the proposed settlement.

## Issues

1. Whether the Court of Chancery abused its discretion in approving the class/derivative settlement.
2. Whether the Court of Chancery reasonably evaluated the likelihood that the directors’ decision would be protected by the business judgment rule.
3. Whether the Court of Chancery reasonably assessed the strength of the corporate waste claims and the adequacy of the settlement consideration in light of litigation risk.

## Decision

- The Delaware Supreme Court affirmed the Court of Chancery’s order approving the settlement.
- The Supreme Court applied an abuse-of-discretion standard to the settlement approval.
- The Court held that the Chancery Court reasonably concluded the claims were weak, including because it was highly probable the transaction would receive business judgment rule review.
- The Court held that the Chancery Court did not abuse its discretion in finding the settlement fair and reasonable under all the circumstances.

## Legal Principles

- Appellate review of a trial court’s approval of a class or derivative settlement focuses on whether the trial court abused its discretion, not on deciding the underlying merits as in a final adjudication.
- In evaluating a proposed settlement, the trial court may weigh the apparent strength of claims, defenses, and the risks, costs, and delay of continued litigation against the benefits obtained through settlement.
- A board decision is likely to receive business judgment rule protection when made through a process reflecting independence, disinterestedness, and informed decision-making, including use of an independent special committee and qualified advisers.
- Corporate waste claims face a high bar; the presence of a rational basis for concluding the transaction provides corporate benefit undermines a waste theory.
- A settlement may be approved if it falls within a range of reasonableness given the assessed probabilities of success and the consideration obtained, even if objectors believe more could be recovered at trial.

## Conclusion

The Delaware Supreme Court upheld settlement approval because the Court of Chancery reasonably assessed that business judgment deference and the demanding waste standard made the plaintiffs’ claims unlikely to succeed, and it acted within its discretion in finding the settlement fair and reasonable.


Kahn v. Sullivan, 594 A.2d 48 (Del. 1991)