Hammer was the CEO and
Chairman of the Board of Occidental. He arranged for Occidental to make a
large ($85M) charitable contribution to build a museum to house Hammer's
art collection.
The museum was to be called
the Hammer Museum (not the Occidental Museum), and would have a giant
painting of Hammer in the lobby.
Occidental shareholders
brought two different derivative lawsuits challenging the use of corporate funds to build the museum. Both
suits were consolidated and settled. However, the Court had to approve
the settlement.
During the settlement
negotiations, the terms of the donation was revised and then got rid of
the name and the giant painting.
The Trial Court approved the
settlement. Some of the shareholders didn't like the settlement and
appealed.
The Trial Court found that
the huge donation was not a good business decision. However, whether or
not it was a good decision was not their problem. The Business
Judgment Rule only requires that a
business decision to not be reckless or unconscionable.
The Appellate Court affirmed.
The Appellate Court noted
that charitable donations are expressly authorized by Delaware law (8
Del.C. §122(9)), and there is no
limit on how much can be donated.
The Court found that because
of the Business Judgment Rule, the
only time a court should overturn a business decision was when it amounted
to corporate waste.
Corporate waste can be defined as "an exchange of
corporate assets for consideration so small as to lie beyond the range
at which a reasonable person might be willing to trade.
The Court found that the
Trial Court's holding that the donation didn't amount to corporate
waste was not an abuse of discretion.
