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Affirmed and Opinion filed November 1,=20 2007.

 

 

In The

 

Fourteenth Court=20 of Appeals

____________

 

NO. 14-06-00062-CV

____________

 

PETER=20 ELLOWAY, On Behalf Of Himself and All Others Similarly=20 Situated, = Appellant

 

V.

 

DONNA C.=20 PATE, In Her Capacity As Independent Executor of the Estate of = JAMES L.=20 PATE, JAMES J. POSTL, TERRY L. SAVAGE, H. JOHN GREENIAUS, BRENT = SCOWCROFT,=20 LORNE R. WAXLAX, FORREST R. HASELTON, C. BERDON LAWRENCE, and = GERALD B.=20 SMITH, = Appellees

 

 

On Appeal from the = 295th District Court

Harris County, = Texas

Trial Court Cause = No. 2002-16085

 

 

O P I N I=20 O N

This is a=20 shareholder class action brought by, appellant, Peter Elloway, on = Behalf=20 of Himself and All Others Similarly Situated, against appellees, = Donna C.=20 Pate, In Her Capacity As Independent Executor of the Estate of = James L.=20 Pate, James J. Postl, Terry L. Savage, H. John Greeniaus, Brent = Scowcroft,=20 Lorne R. Waxlax, Forrest R. Haselton, C. Berdon Lawrence, and = Gerald B.=20 Smith, for the alleged breach of their fiduciary duties in = connection with=20 the acquisition of Pennzoil-Quaker State Company (APennzoil@) by Shell=20 Oil Company (AShell@). =20 We affirm.

           = ;            =             &= nbsp;           &n= bsp; =20 Background

James=20 Postl was president and chief executive officer of Pennzoil and a = director=20 of Pennzoil.  James Pate was chairman of Pennzoil=3Ds Board of=20 Directors and chairman of the executive committee.  Terry = Savage,=20 John Greeniaus, Brent Scowcroft, Lorne Waxlax, Forrest Haselton, = Berdon=20 Lawrence, and Gerald Smith were members of Pennzoil=3Ds Board of=20 Directors (the ADirectors=3D). =20

On=20 February 22, 2002, Rob Routs, President of Shell Oil Products US,=20 approached Jim Postl with a cash offer for Shell to purchase = Pennzoil for=20 the price of $18.50 per share.  Postl informed Routs Pennzoil = was not=20 for sale and it was committed to, and confident in, its five-year=20 strategic plan.  However, Postl told Routs he would take the = offer to=20 Pennzoil=3Ds=20 board.  On March 5, 2002, Postl took the offer to board, = which agreed=20 that the price was not adequate, but authorized Postl to have = further=20 discussions with Shell Ato see if=20 a transaction could be negotiated that would be in the best = interests of=20 the Company=3Ds=20 stockholders.@ =20

Postl also=20 informed the board that he would engage the investment banking = company=20 Morgan Stanley.  On March 7, 2002, Postl entered into an = agreement=20 for Morgan Stanley to provide Pennzoil with financial advice and=20 assistance in connection with the proposed Shell/Pennzoil = merger.  In=20 the event the sale did not go through, Morgan Stanley would = receive an=20 advisory fee of $100,000.  If the sale of the company was=20 accomplished, Morgan Stanley would receive a transaction fee to be = calculated as A0.40 % of=20 the transaction=3Ds=20 Aggregate Value.@ =20

Also, on=20 March 5, 2002, a compensation committee meeting was held.  = The=20 committee members were Forrest Haselton, Terry Savage, and John=20 Greeniaus.  The compensation committee approved several = amendments of=20 the company=3Ds benefits=20 in the event of a change in control:[1] =20

amend the = company=3Ds executive = severance plan=20 with regard to a change in control of the company;

amend = Pate=3Ds agreement to = provide for=20 coverage under Pennzoil=3Ds senior executive = severance=20 plan so that if a change in control of the company occurred, Pate = would be=20 entitled to, in addition to the continuation of his annual = consulting fee,=20 three times his annual consulting fee upon the date of such change = in=20 control (the APate = agreement@);

enter into an = agreement with=20 Postl providing that Postl would provide consulting and advisory = services=20 to the company for the three-year period following his termination = and a=20 consulting fee of $500,000 per year (the APostl = agreement@);

amend the = company=3Ds annual incentive = plan (to=20 provide a full year of benefits in the event of a change in = control) and=20 long-term incentive plan (payout of benefits upon a change in = control);=20 and

modify the=20 definition of Achange-in-control.@

On March=20 7, 2002, Routs and Ron Blakely, Shell=3Ds chief=20 financial officer, met with Postl and Tom Kellagher, = Pennzoil=3Ds chief=20 financial officer.  Postl reviewed Pennzoil=3Ds publicly=20 available information with Routs and Blakely.  On March 8, = 2002,=20 Pennzoil and Shell entered into a confidentiality agreement.  = On=20 March 13, 2002, Shell and Pennzoil had a due diligence = meeting.  On=20 March 15, 2002, Routs called Postl to tell him Shell was = increasing its=20 offer to $20 per share.  Postl responded that he was not = prepared to=20 recommend $20 per share to the Pennzoil board. =20

On March=20 18, 2002, Pennzoil=3Ds board=20 had a telephonic meeting.  The board addressed the indictment = of its=20 independent public accountants, Arthur Andersen, and the need to = appoint=20 other independent public accountants.  Postl also informed = the board=20 Shell had indicated it was prepared to increase its proposed price = to $20=20 per share, the companies had entered into a confidentiality = agreement, and=20 Pennzoil had retained Morgan Stanley to assist in advising = Pennzoil in=20 connection with any potential transaction.  Also, on March = 18, 2002,=20 a telephonic compensation committee meeting was held, during which = the=20 committee approved recommending the granting of stock = options. =20

On March=20 19, 2002, Routs and Postl met and agreed Shell=3Ds and=20 Pennzoil=3Ds chief=20 financial officers would meet to go over the financial assumptions = Shell=20 would use to prepare its final proposal.  Blakely and = Kellagher met=20 the afternoon of March 19. 

On March=20 22, 2002, Routs and Postl met.  They agreed this would be the = last=20 attempt at negotiating an agreeable  sales prices.  = Routs=20 offered $21.50, which Postl rejected.  Routs left the room = for awhile=20 and conferred with Blakely.  Routs returned with a $22 per = share=20 offer, which Postl said he would recommend to the Pennzoil = board. =20

Over the=20 weekend, Shell learned of the change-in-control benefits.  = Routs was=20 angry when he learned about the cost of the change-in-control=20 benefits.  The final cost of the change-in-control benefits = was=20 substantially more than the amount Shell had estimated.  On = the=20 morning of March 25, Routs called Postl, asking him to rescind the = change-in-control benefits.  Postl refused.  Routs = considered=20 terminating the transaction or reducing the price, but Shell did=20 neither.  On March 25, 2002, the Pennzoil board met and voted = to=20 recommend to the shareholders the sale of the company to Shell for = $22 per=20 share.  Shell issued a press release announcing the merger=20 agreement. 

On August=20 1, 2002, a shareholders meeting was held, at which time 99% of=20 Pennzoil=3Ds voting=20 shareholders approved the sale of Pennzoil to Shell.[2] =20 On October 1, 2002, Shell and Pennzoil completed the merger.=20  

Elloway=20 alleges the price of $22 per share paid to the shareholders was = grossly=20 inadequate and unfair.  Elloway asserts each of the Directors = breached their fiduciary duties of due care and loyalty under = Delaware law=20 by failing to maximize shareholder value in connection with the = sale of=20 Pennzoil.[3] =20 The crux of Elloway=3Ds=20 complaint is the Directors agreed to the unfair sale price to = insure Shell=20 would not walk away from the deal when it learned of the cost of = the=20 increased benefits.  Elloway alleges the fact that Shell was = ready=20 and willing to pay the additional amount for the change-in-control = benefits is evidence of the Acushion@ = the=20 Directors had built into the $22 per share sale price, and the = Directors=20 should have obtained the additional amount in the form of an = increased=20 price per share. 

Specifically,=20 Elloway alleges the Directors breached their fiduciary duties by:=20

(1) failing to = inform=20 themselves of all information reasonably available to = them;

(2) granting to = themselves,=20 during negotiations, substantial change in-control-benefits, which = improperly motivated them to push through the acquisition = regardless of=20 whether the price was fair, and low-balling the sale price in = order to=20 build in a Acushion@ to cover the = increased=20 acquisition cost resulting from the additional grants of change in = control=20 benefits;

(3) failing to take = steps to=20 maximize the value of Pennzoil by taking steps to avoid = competitive=20 bidding, and failing to make good faith attempts to solicit other=20 potential buyers;

(4) failing to = properly value=20 Pennzoil;

(5) failing to = protect=20 against the numerous conflicts of interest resulting from their = own=20 interrelationships with the transaction; and

(6)=20 failing to disclose all material information that would permit=20 Pennzoil=3Ds=20 shareholders to cast a fully informed vote.

After=20 Elloway rested, the trial court granted the Directors=3D = motion=20 for a directed verdict on Elloway=3Ds due care=20 claim.  The jury rejected Elloway=3Ds claims=20 for breach of the duty of disclosure and duty of loyalty.  = The jury=20 further found the Pennzoil shareholders=3D = vote=20 approving the merger with Shell was fully and fairly = informed.  On=20 December 15, 2005, the trial court entered a take nothing judgment = on=20 Elloway=3Ds claims=20 against the Directors. 

           = ;            =             &= nbsp;    =20 Exculpatory=20 Provision

In his=20 first issue, Elloway complains the trial court erred in granting a = directed verdict on his due care claim.  Judgment without or = against=20 a jury verdict is proper at any course of the proceedings only = when the=20 law does not allow reasonable jurors to decide otherwise.  = City of=20 Keller v. Wilson, 168 S.W.3d 802, 823 (Tex. 2005).  The = test for=20 legal sufficiency is the same for directed verdicts and judgments=20 notwithstanding the verdict.  Id.  When reviewing = the=20 legal sufficiency of the evidence, we review the evidence in the = light=20 most favorable to the challenged finding and indulge every = reasonable=20 inference that would support it.  Id. at 822.  We = credit=20 favorable evidence if reasonable fact finders could, and disregard = contrary evidence unless a reasonable fact finder could not.  = Id. at 827.  The evidence is legally sufficient if it = would=20 enable fair-minded people to reach the verdict under review.  = Id.  We must affirm the directed verdict if the record = establishes any ground that entitles the movant to judgment as a = matter of=20 law, even if it was not raised in the motion.  Ibarra v. = National=20 Constr. Rentals, Inc., 199 S.W.3d 32, 37 (Tex. = App.CSan=20 Antonio 2006, no pet.); Westchester Fire Ins. Co. v. Admiral = Ins.=20 Co., 152 S.W.3d 172, 191 (Tex. App.CFort Worth=20 2004, pet. filed). 

The=20 Directors argue Elloway=3Ds due care=20 claims were negated by the exculpatory provision in = Pennzoil=3Ds=20 certificate of incorporation.  Under Delaware law, a = certificate of=20 incorporation may contain:

A=20 provision eliminating or limiting the personal liability of a = director to=20 the corporation or its stockholders for monetary damages for = breach of=20 fiduciary duty as a director, provided that such provision shall = not=20 eliminate or limit the liability of a director:  (i) For any = breach=20 of the director=3Ds duty of=20 loyalty to the corporation or its stockholders; (ii) for acts or = omissions=20 not in good faith or which involve intentional misconduct or a = knowing=20 violation of law; . . . or (iv) for any transaction from which the = director derived an improper personal benefit. . . .

8 Del. Code ' = 102(b)(7). 

With=20 respect to the limitation of the Directors=3D = liability, Article IX of Pennzoil=3Ds=20 certificate of incorporation provides, in relevant = part:

A director=20 of this Corporation shall not be liable to the Corporation or its=20 stockholders for monetary damages for breach of fiduciary duty as = a=20 director, except to the extent such exemption from liability or = limitation=20 thereof is not permitted under the General Corporation Law as the = same=20 exists or may hereafter be amended. 

The=20 adoption of a charter provision, in accordance with Section = 102(b)(7),=20 bars the recovery of monetary damages from directors for a = successful=20 shareholder claim that is based on violations of the duty of care, = but not=20 for violations of the fiduciary duties of loyalty or good = faith. =20 Emerald Partners v. Berlin, 787 A.2d 85, 90 (Del. = 2001).  An=20 exculpation clause authorized by section 102(b)(7) is in the = nature of an=20 affirmative defense and, therefore, the directors bear the burden = to show=20 they are entitled to its protection.  In re Walt Disney = Co. Deriv.=20 Litig., 907 A.2d 693, 752 (Del. Ch. 2005), = aff=3Dd, 906 A.2d=20 27 (Del. 2006).

In their=20 answer, the Directors pleaded that Elloway=3Ds claim=20 for monetary damages for any alleged breaches of the duty of care = were=20 barred by the limitation of liability provision in = Pennzoil=3Ds=20 certificate of incorporation.  At the hearing on their motion = for a=20 directed verdict, the Directors argued there was no evidence of = gross=20 negligence to support Elloway=3Ds due care=20 claim, and the trial court granted the directed verdict on that=20 basis.  The Directors did not argue the exculpatory = provision. =20 Elloway, therefore, contends the Directors are forcing him to = litigate the=20 affirmative defense of section 102(b)(7) for the first time on = appeal,=20 particularly when the certificate of incorporation was not in = evidence at=20 trial.  Elloway further complains there were no jury = findings, in=20 accordance with section 102(b)(7), and all of the = Directors=3Ds acts or=20 omissions were in good faith and did not involve intentional = misconduct or=20 a knowing violation of the law, which are elements of proof under = section=20 102(b)(7). 

The=20 Directors argue, given the jury=3Ds=20 unchallenged finding on loyalty and good faith, there was nothing = to=20 submit to the jury.  Instructions to Question No. 4, the=20 breach-of-loyalty question, state: 

The duty of loyalty = requires=20 a director to act in good faith, to make informed decisions on = behalf of=20 the shareholders, rather than in their own interests.  The = best=20 interests of the shareholders must take precedence over any = interest=20 possessed by a director and not shared by the shareholders=20 generally.

The duty=20 of loyalty also means that, in a transaction involving the sale of = a=20 company, that [sic] the directors have the duty to act reasonably = to seek=20 the highest value for the stock reasonably obtainable.

The=20 instructions accompanying Question No. 4 asked the jury to = determine=20 whether each director had: (1) acted in good faith; (2) made = informed=20 decisions on behalf of the shareholders; (3) acted in his or her = own=20 interest; (4) acted so that the best interests of the shareholders = took=20 precedence over any interest possessed by a director and not = shared by the=20 shareholders generally; and (5) acted reasonably to seek the = highest value=20 reasonably obtainable for the stock.  Additionally, in a = preliminary=20 instruction, the jury was charged that the ADirectors=20 have a duty to inform themselves, prior to making a decision[,] of = all=20 material information reasonably available to them.@ =20

A=20 director=3Ds duty in=20 conducting a sale of the company is to seek out, in a manner = consistent=20 with his or her fiduciary duties, Athe best=20 value reasonably available to the stockholders.@ =20 In re Lukens, Inc. S=3Dholders=20 Litig., 757 A.2d=20 720, 731 (Del. Ch. 1999). aff=3Dd sub=20 nom,=20 Walker v. Lukens, 757 A.2d 1278 (Del. 2000).  In a = merger or=20 sale, the director=3Ds duty of=20 care requires the director, before voting on a proposed plan of = merger or=20 sale, to inform himself and his fellow directors of all material=20 information that is reasonably available to them.  Cede = & Co.=20 v. Technicolor, Inc., 634 A.2d 345, 368 (Del. 1993), = modified on=20 other grounds, 636 A.2d 956 (Del. 1994). 

With=20 respect to his due care claim, Elloway alleged the Directors = failed to=20 properly inform themselves of all information, i.e., the value of = the=20 change-in-control benefits and the financial health of the = company,=20 available to them, which, in turn, tainted the negotiation = process, thus,=20 preventing them from seeking the highest price reasonably=20 obtainable.  Because the elements of Elloway=3Ds due care=20 claim were submitted in instructions accompanying the loyalty = question and=20 the jury=3Ds negative=20 answer to the loyalty question, Elloway=3Ds due care=20 claim was also necessarily rejected.  See Shupe v.=20 Lingafelter, 192 S.W.3d 577, 580 (Tex. 2006) (per curiam) = (holding=20 jury=3Ds negative=20 finding on negligence negated unsubmitted negligent entrustment = issue as a=20 matter of law, rendering error, if any, in omission of instruction = on=20 negligent entrustment harmless); Cooper v. Lyon Fin. Servs., = Inc.,=20 65 S.W.3d 197, 209 (Tex. App.CHouston=20 [14th Dist.] 2001, no pet.) (holding, because damages attributable = to=20 plaintiff=3Ds breach=20 of warranty claims were the same as those for = plaintiff=3Ds DTPA=20 claim, the jury=3Ds finding=20 of no damages on the DTPA claim rendered error, if any, in = granting=20 directed verdict on plaintiff=3Ds breach=20 of warranty claims harmless).

Elloway=20 complains (1) the facts forming the basis of his due care claim = are=20 different from those relating to the duty of loyalty claims, and = (2) there=20 was no jury determination on damages for breach of the duty of = loyalty=20 and, therefore, that basis for finding harmless error is absent=20 here.  To the contrary, many of the facts forming = Elloway=3Ds due care=20 and loyalty claims are the same.  In any event, the key point = Elloway=20 misses is the elements of his due care claim were the same as = those=20 submitted to the jury on his loyalty claim.  Elloway has not = asserted=20 that the instructions accompanying the breach-of-loyalty issue = were in any=20 way incorrect. 

Moreover,=20 Elloway did not present sufficient evidence.  Director = liability for=20 breaching the duty of care is predicated on a showing of gross=20 negligence.  Aronson v. Lewis, 473 A.2d 805, 812 (Del. = 1984),=20 overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 = (Del.=20 2000).  To overcome the presumption that the Directors acted = on an=20 informed basis, Elloway must show gross negligence.  = Crescent/Mach=20 I Partners, L.P. v. Turner, 846 A.2d 963, 985 (Del. Ch. = 2000). =20 Gross negligence is a reckless indifference to or a deliberate = disregard=20 of the whole body of stockholders or actions which are without the = bounds=20 of reason.  Benihana of Tokyo, Inc. v. Benihana, Inc., = 891=20 A.2d 150, 192 (Del. Ch. 2005), aff=3Dd, 906 A.2d=20 114 (Del. 2006). 

Elloway=20 contends he produced substantial evidence the Pennzoil board was=20 recklessly informed about critical issues and acted outside the = bounds of=20 reason.  Elloway first asserts the Directors, with the = exception of=20 Pate and Postl, Awholly=20 ignored the issue@ = of=20 synergies.  Synergies are the aspects of the a merger that = allow the=20 acquiring company to enhance its earnings, for example, by = eliminating=20 overlapping areas.  Elloway alleges Pate, Postl, and Morgan = Stanley=20 concealed the value of the merger synergies from the rest of the=20 board.  Director Greeniaus testified that someone said = synergies were=20 not relevant to the seller in the transaction. 

Morgan=20 Stanley calculated the synergies of the merger.  At its = presentation=20 to the board on March 25, Morgan Stanley did not include = synergies,=20 although it did when it was working with Postl during negotiations = with=20 Shell.[4] =20 However, contrary to Elloways=3D = allegation, Postl testified synergies were reviewed with the board = in=20 terms of what Shell was prepared to pay.  =

Elloway=20 also asserts Postl and Pate concealed from the remaining Directors = how=20 well Pennzoil was performing financially at the time of the = proposed=20 transaction, and further that those Directors made no effort to = determine=20 for themselves the company=3Ds then=20 current performance.  According to one of Elloway=3Ds expert=20 witnesses, Prof. Bernand Black, it was Pate=3Ds and=20 Postl=3Ds=20 responsibility to give updated financials or projections to the = other=20 board members, but the other board members still should, and = could, have=20 asked for that information. 

Again,=20 contrary to Elloway=3Ds=20 assertion, the minutes of the March 5, 2002 board meeting state = Postl=20 Aprovided a=20 projection of first quarter earnings and financial performance by = each=20 business.@ =20 Director Gerald Smith testified the board, at the March 5 meeting, = was=20 told the first quarter looked promising, but two key = areasCconsumer=20 business and international businessCwere not=20 doing as well.  Also, Prof. Black further stated, = AI did not=20 mean to convey the impression that [the Directors] were unaware of = how the=20 company was doing.@ =20

Elloway=20 further contends the Directors did not exercise Aan extra=20 level of care and attention@ = in=20 choosing a sales process to insure they obtained Athe=20 highest price . . . for the shareholders.@ =20 Prof. Black opined the board Ashould=20 take overall charge . . . of the major decisions that are going to = be=20 made; . . .@ = such as=20 conducting an auction or looking for alternative buyers.  In=20 documents prepared for Pennzoil management for negotiation = purposes,=20 Morgan Stanley advised Pennzoil management it had a fiduciary duty = to shop=20 the company to other potential buyers in the absence of a public=20 auction. 

Once the=20 merger was announced, by definition, Pennzoil was available and on = the=20 market.  No other companies approached Pennzoil interested in = a=20 merger, and in the months following the announcement, = Pennzoil=3Ds stock=20 never traded at $22, but just below.  Postl testified the = issue of=20 other potential buyers was discussed with the board, but it was = concluded=20 there were no other credible buyers.  An auction is held when = there=20 is confidence that there is a lot of interest and = competition.  Here,=20 with no other credible buyers, holding an auction would not make = sense.[5] =20 Several witnesses testified that even when Pennzoil=3Ds stock=20 had fallen to $9 or $10 the previous year, no one approached = Pennzoil=20 about buying the company.[6] =20 The duty to take reasonable steps to secure the highest = immediately=20 available price does not invariably require the board to conduct = an=20 auction process or a targeted market canvass because there is no = single=20 blueprint for fulfilling the duty to maximize value.  In = re Toys=20 AR@ = US, Inc.=20 S=3Dholder=20 Litig., 877 A.2d=20 975, 1000 (Del. Ch. 2005); see also Crescent/Mach I Partners, = L.P.,=20 846 A.2d at 985B86=20 (citations omitted) (AGenerally,=20 when a board of directors is considering a single offer[,] = fairness=20 requires a canvass of the market to determine if higher bids can = be=20 elicited.  However, if the directors possess a body of = reliable=20 evidence with which to evaluate the fairness of the transaction[,] = they=20 are permitted to approve the transaction without conducting a = canvass of=20 the market.@). =20

Elloway=20 asserts the Directors failed to inform themselves about the = conflicts of=20 interest arising from the March 18 stock option grants.  The = date for=20 pricing the stock option grants was March 18, which was trading=20 considerably lower than the $20 offer then on the table.  = Elloway=20 further argues the trial court ignored the evidence of insider = trading as=20 shown by the following exchange:

Court:  You=20 don=3Dt have to repeat = the=20 facts.  How does that rise to a level of gross negligence, = which has=20 been defined under Delaware law as reckless indifference to or a=20 deliberate disregard of the whole body of stockholders or actions = also=20 which are without the bounds of reason?  The testimony has = been that=20 it is routine for directors to increase their = compensation.

Plaintiff=3Ds Counsel:  = Not during=20 the merger negotiations, not at the time -- they went -- the stock = options=20 were being granted as a result we are saying of insider = trading.  I=20 mean, if you are not showing something that is consciously = indifferent at=20 this point, you have Shell saying that this was insider=20 trading.

Court: =20 If you will remember I limined that out.  So that evidence is = not in=20 the record, that is insider trading.

Elloway=20 argues the trial court based its ruling on a fundamental = misunderstanding=20 of the record when it believed no evidence that the grant of stock = options=20 to top executives amounted to insider trading was in the = record. =20 Although the trial court had granted the Directors=3D = motion in=20 limine on the issue of insider trading, Elloway asserts testimony=20 regarding insider trading came in without objection through Prof. = Black,=20 Brian Folely, another of Elloway=3Ds experts,=20 and Ron Blakely, Shell=3Ds chief=20 financial officer.  Elloway argues under the trial = court=3Ds directed=20 verdict analysis, proof of insider trading was necessary to rebut = a motion=20 for directed verdict on the due care claims, but the court simply = ignored=20 the evidence. 

The=20 Directors respond that Elloway=3Ds=20 allegation of insider trading is a mischaracterization of the=20 record.  Prof. Black, Foley, and Blakely[7]=20 testified if Pate and Postl had purchased stock on the=20 public market on March 18, with the knowledge that Shell = had an=20 offer on the table to purchase the company, then there would be=20 insider-trading implications.  There was no testimony that = the=20 situation here was insider trading.  =

Several=20 witnesses testified Pennzoil had granted stock options on an = annual basis=20 and, with the exception of the 2001 stock options, Pennzoil = usually=20 granted those options in March.  Moreover, Director Terry = Savage, who=20 was a member of the compensation committee, testified the process = for=20 developing the list for options began before the February 22 = overture by=20 Shell.  To grant stock options, the company had to determine = how many=20 options it was going to grant.  Towers Perrin, = Pennzoil=3Ds outside=20 compensation consultant, performed that calculation.  Mark = Esselman,=20 senior vice president of human resources at Pennzoil, explained he = would=20 make recommendations to Postl regarding the allocation to each = business=20 unit by looking at how many people at different levels each = business unit=20 had.  Charles Essick of Towers Perrin testified February 2002 = billings showed Towers Perrin was involved in the March stock = options=20 grants. 

Furthermore,=20 the stock options were company-wide, not just for key = executives. =20 The stock options were important because Pennzoil employees had = been=20 working without pay raises.  When the options were granted, = Shell had=20 increased its offer from $18.50 to $20 per share, which the = Directors felt=20 was still inadequate.  The Directors testified they did not = know, at=20 that time, if Shell would offer an acceptable price and a merger = would be=20 accomplished.  Finally, Elloway=3Ds argument=20 to the trial court belies his position on appeal that there was = evidence=20 of insider trading.  During the hearing on the motion in = limine,=20 Elloway=3Ds counsel=20 stated, A[w]e=3Dre just=20 saying that [granting the options] was like insider trading,=20 that=3Ds all=20 we=3Dre=20 saying.  We=3Dre not=20 saying it is insider trading.@ =20

Elloway=20 also contends there was no consultation with Towers Perrin = regarding the=20 March compensation amendments and such amendments were approved in = a hasty=20 manner.  The process regarding the complained of compensation = changes, i.e., change-in-control benefits, started the previous = October,=20 as stated in the minutes of the October 4, 2001 compensation = committee=20 meeting and explained by the testimony of Director Savage, a = member of the=20 compensation committee.  The minutes of the December 11, 2001 = compensation committee meeting reflect that Charles Essick of = Towers=20 Perrin participated in that meeting and it was on the = meeting=3Ds agenda=20 to review and approve changes to the annual[8]=20 and long-term incentive plans.[9] =20 With respect to Pate=3Ds and=20 Postl=3Ds=20 respective consulting agreements, Towers Perrin was not = involved. =20 Savage explained the consulting agreements were not a question for = Tower=20 Perrin=3Ds advice,=20 but a business decision of the compensation committee.=20

Elloway=20 complains, in assessing changes to Pate=3Ds and=20 Postl=3Ds=20 compensation arrangements, the Directors did not assess the = precise value=20 of their existing benefits in the event of a change in control = against the=20 precise value of the purportedly new benefits.  Elloway = alleges had=20 the Directors asked, they would have learned the improvements = granted=20 during the March 5 and March 18 compensation committee meetings = and March=20 25 board meeting were $85 million.  Elloway contends Shell = would have=20 paid more to the shareholders for the company, instead of paying=20 management for substantially increased change-in-control = benefits. =20

Shell had=20 estimated the total transaction cost for the merger, including=20 change-in-control benefits, was $20 million.  Between the = Friday=20 Postl agreed to recommend the $22 offer to the board and=20 Pennzoil=3Ds Monday=20 board meeting, Shell learned of the amount of the = change-in-control=20 benefits exceeded the amount it had estimated.  Routs and = Blakely=20 were angry about the increased amount because they did not feel = Postl had=20 been forthcoming at the due diligence meeting when the issue of=20 change-in-control benefits came up.  The morning of March 25, = Routs=20 called Postl, asking him to rescind the changes to the = change-in-control=20 benefits.  Postl refused.  Routs had considered reducing = the per=20 share purchase price or terminating the deal.  = Shell=3Ds lawyers=20 advised Routs the change was not material.  Shell did not = reduce the=20 $22 per share price or walk away from the deal. 

Routs=20 requested and received authority from Shell=3Ds=20 committee of managing directors to negotiate with an offer of up = to $20=20 per share, leaving open the option that he could request an = additional=20 $2.  Routs did not have the authority to offer more than $22, = and=20 Routs stated there were no circumstances under which he would have = gone=20 back to the Shell=3Ds board to=20 ask for authority to offer more than $22 per share.  = Similarly, Lisa=20 Davis, who led the team that supported Shell=3Ds=20 negotiations, did not recommend that Routs request authority to = offer more=20 than $22 per share because Pennzoil was not worth more than = that. =20

Elloway=20 also relies on figures contained in Pennzoil=3Ds=20 five-year strategic plan, which had been in place since the summer = of=20 2001, as evidence the Directors did not seek the highest available = price=20 from Shell.  Postl explained a strategic plan, by its nature, = is=20 optimistic, i.e., it assumes success, and it is used to motivate = the=20 company=3Ds=20 employees.  The plan, which was described as Avery=20 aggressive,@ = forecasted Pennzoil=3Ds stock=20 would be worth $25 by the end of 2005.  Several witness = testified,=20 however, to achieve that price, every assumption in the plan would = have to=20 be met with no room for risk or uncertainty.  As Director = Gerald=20 Smith explained, Aif all=20 things went according, the sun and moon and all the stars were = aligned,=20 there was a possibility we could hit [the plan], but clearly [the = plan]=20 was aggressive and optimistic.@ =20 Similarly, Stephen Trauber of Morgan Stanley viewed the plan as=20 Aextraordinarily=20 aggressive.@ =20

Pennzoil=20 admitted to Blakely its five-year strategic plan Ahad some=20 stretch in it.@ =20 Pennzoil management viewed the chances of achieving the plan as=20 A50/50.@ =20 Blakely testified Shell attributed more risk in the plan than = Pennzoil=20 had.  Pennzoil management said the company was doing well as = compared=20 to the plan, but that was not the basis on which Shell calculated=20 long-term values.  Davis also testified Shell viewed Pennzoil = as a=20 low-growth business, and believed the strategic plan was very = optimistic=20 and it did not affect Shell=3Ds=20 valuation of Pennzoil. 

The=20 Directors testified they believed $22 per share was a very good = price for=20 the company.  It represented a 55.5 percent premium over=20 Pennzoil=3Ds=20 stock=3Ds trading=20 price four weeks prior to the announcement of the merger, a 42 = percent=20 premium over Pennzoil=3Ds trading=20 price on March 22Cthe day=20 Routs and Postl agreed to the $22 per share price, and a 33 = percent=20 premium over Pennziol=3Ds all-time=20 high trading price of $16.50 per share.[10] =20

Also,=20 Pennzoil had not been operating without problems.  Two major=20 components in achieving the strategic plan were the growth and = success of=20 Pennzoil=3Ds consumer=20 business and international business.  The previous year, = Pennzoil had=20 cut it=3Ds=20 investment grade dividend by 80 percent so it could invest more in = the=20 company..  Pennzoil=3Ds stock=20 fell to around $9 or $10 per share.  Pennzoil=3Ds=20 investment rating was downgraded, making it more expensive to = borrow=20 money, and more expensive and difficult to raise capital to invest = in and=20 expand its consumer and international businesses.  Pennzoil = had a=20 strong position in the lube market, but that market was shrinking = and it=20 had significant competition. 

Finally,=20 as Director Smith testified, he was a shareholder with no stock = options,=20 so his position was the same as that of any other = shareholder. =20 Because the board members were paid a fee for serving as = directors, if=20 they had really wanted to take a position to advance their alleged = self-interests, they would have kept the company going to continue = receiving their fees. 

Elloway=20 also alleges the Directors failed to disclose certain information = in the=20 Proxy so the shareholders could make an informed vote on the = merger. =20 Elloway asserts the Directors failed to disclose (1) Morgan=20 Stanley=3Ds=20 estimated synergies were not part of its presentation to the = board; (2)=20 Pennzoil=3Ds internal=20 earnings estimates exceeded those of Wall Street analysts; (3) = management=20 requested, in March, and received additional change-in-control = benefits=20 totaling $84.9 million; (4) additional change-in-control benefits = were not=20 disclosed to Shell until after the $22 price had been agreed upon; = and (5)=20 stock options were granted when Shell=3Ds=20 $20-offer was pending.  Elloway also complains the Proxy=20 misrepresented that executive benefits were vetted by Towers = Perrin, and=20 understated the total change-in-control benefits received by top=20 executives by $4 million. 

The Proxy=20 informed shareholders that Pennzoil=3Ds=20 directors had been named in two lawsuits filed on March 28, 2002, = and=20 April 4, 2002, seeking class certification on behalf of Pennzoil=20 shareholders.  The Proxy explained the petitions alleged the=20 directors had breached their fiduciary duties in connection with = the=20 proposed sale of Pennzoil to Shell at a price alleged to be = grossly=20 inadequate and unfair.  The petitions further alleged the = directors=20 derived unspecified personal financial benefits from the = acquisition at=20 the expense of Pennzoil=3Ds=20 shareholders.  Finally, the Proxy gave the styles and cause = numbers=20 of the two lawsuits, which sought to enjoin the sale of Pennzoil = to=20 Shell. 

Moreover,=20 these are essentially the same complaints Elloway raises with = regard to=20 either the concealment of information from the Directors or the=20 Directors=3D = failure=20 to inform themselves which are without merit.  We conclude = Elloway=20 has not presented evidence that the Directors=3D = conduct=20 constitutes gross negligence.  Elloway=3Ds first=20 issue is overruled. 

           = ;            =             &= nbsp;         =20 Jury=20 Instruction

In his=20 second issue, Elloway contends the trial court submitted an = irrelevant=20 affirmative defense to the jury in the form of a prefatory=20 instruction.  We review a trial court=3Ds decision=20 to submit or refuse a particular instruction under an abuse of = discretion=20 standard.  Shupe, 192 S.W.3d at 579.  An abuse of = discretion occurs when the trial court acts without reference to = guiding=20 principles.  Texas Dep=3Dt of Human=20 Servs. v. E.B., 802=20 S.W.2d 647, 649 (Tex. 1990).  The jury should not be burdened = with=20 surplus instructions.  Acord v. General Motors Corp., = 669=20 S.W.2d 111, 116 (Tex. 1984).

The=20 complained of prefatory instruction states: 

A director=20 may rely in good faith upon the records of the corporation and = such=20 information, opinions, reports or statements presented to the = corporation=20 by any of the corporation=3Ds officers=20 or employees, or committees of the board of directors, or by any = other=20 person as to matters the director reasonably believes are within = such=20 other person=3Ds=20 professional or expert competence and who has been selected with=20 reasonable care by or on behalf of the corporation, but a director = may not=20 avoid his or her active and direct duty of oversight in connection = with=20 the merger.  Directors have a duty to inform themselves, = prior to=20 making a decision of all material information reasonably available = to=20 them.

The=20 prefatory instruction is derived from 8 Del. Code ' = 141 (e),=20 which states:

A member=20 of the board of directors, or a member of any committee designated = by the=20 board of directors, shall, in the performance of such = member=3Ds duties,=20 be fully protected in relying in good faith upon the records of = the=20 corporation and upon such information, opinions, reports or = statements=20 presented to the corporation by any of the corporation=3Ds officers=20 or employees, or committees of the board of directors, or by any = other=20 person as to matters the member reasonably believes are within = such other=20 person=3Ds=20 professional or expert competence and who has been selected with=20 reasonable care by or on behalf of the corporation.

8 Del. Code ' = 141(e).

Elloway=20 complains the instruction is an affirmative defense.[11] =20 Elloway contends, by including the instruction as a prefatory = instruction,=20 the trial court, in effect, granted a directed verdict on the=20 Directors=3D = good=20 faith defense to his loyalty and non-disclosure claims relieving = them of=20 the burden of proving their defense.  The Directors, on the = other=20 hand, contend section 141(e) is generally not considered to be an=20 affirmative defense under Delaware law, but is a presumption or a = factor=20 to be applied to a variety of inquiries under Delaware law.[12]=20 For reasons explained below, we need not determine whether section = 141(e)=20 is an affirmative defense because error, if any, in the submission = of it=20 as a prefatory instruction was harmless.

Elloway=20 next maintains section 141(e) is applicable only to his breach of = care=20 claims, not his breach of loyalty claims.  See, e.g.,=20 Crescent/Mach I Partners, L.P., 846 A.2d at 985 (stating = section=20 141(e) provides directors are protected from a breach of the duty = of=20 care).  Elloway argues the protections afforded by section = 141(e) do=20 not apply on its face because a breach of the duty of loyalty = occurs when=20 a director is acting in his own self interest, not for the benefit = of the=20 corporation.  Therefore, according to Elloway, the trial = court should=20 not have submitted the section 141(e) instruction in light of the = directed=20 verdict granted on his claims for breach of the duty of = care. =20 Elloway relies on Levermann v. Cartall, which held the = prefatory=20 instruction was improperly included in the court=3Ds charge=20 because it Adid not=20 refer to any particular issue or term used in the charge and could = only be=20 considered by the jury as applying to the case as a = whole.@  393=20 S.W.2d 931, 935 (Tex. Civ. App.CSan=20 Antonio 1965, writ ref=3Dd=20 n.r.e.).

The=20 Directors assert Levemann is not applicable because the = prefatory=20 instruction here was not superfluous because section 141(e) is not = limited=20 to due care claims, but is relevant to the claims submitted to the = jury.  See, e.g., McMillian, 768 A.2d at 505 n.55 = (stating=20 board=3Ds reliance=20 on investment banker is another factor weighing against the=20 plaintiffs=3D = ability=20 to state actionable claim that the directors breached their duty = of=20 loyalty for failure to secure highest value reasonably = attainable);=20 Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1175 = (Del.=20 1995) (noting board=3Ds reliance=20 on reports by investment firms and experienced counsel as evidence = of good=20 faith and overall fairness of process of merger); In re W.=20 Nat=3Dl Corp.=20 S=3Dholders=20 Litig., No.=20 15927, 2000 WL 710192, at *23 (Del. Ch. May 22, 2000) (holding = committee=20 could and did reasonably rely on its expert advisor determining = whether=20 special committee was fully and fairly informed); In re RJR = Nabisco,=20 Inc. S=3Dholder=20 Litig., No. CIV.=20 A. 10389, 1989 WL 7036, at *16 (Del. Ch. Jan. 31, 1989) (stating = special=20 committee appropriately relied on financial advisors finding it = acted good=20 faith).  Delaware courts have applied section 141(e) when = considering=20 claims other than breach of the duty of due care.  We reject=20 Elloway=3Ds=20 contention. 

Finally,=20 Elloway complains the Delaware Supreme Court has held this = affirmative=20 defense is unavailable as a matter of law Awhen a=20 board is deceived by those who will gain from such = misconduct.@ =20 Mills Acquisition Co. v. MacMillan, 559 A.2d 1261, 1284 = (Del=20 1989).  Elloway asserts he has adduced substantial evidence = that=20 Postl and Pate deceived the Directors by concealing material = information=20 regarding merger-related synergies and Pennzoil=3Ds updated=20 positive financials. 

In=20 Mills, two members of senior management (chairman and chief = executive officer, and president and chief operating officer) of = the=20 acquired company would have had a substantial ownership in the new = company.  Id. at 1272.  While the board was under = the=20 impression that the bids to acquire the company were the result of = a fair=20 and unbiased auction process, the chairman and president both = remained=20 silent, concealing from the other directors their misconduct = during the=20 auction to skew the result.  Id. at 1277.  The = court=20 determined there was no board planning and oversight to insulate = the=20 self-interested management from improper access to the bidding=20 process.  Id. at 1282. 

The facts=20 in this case are distinguishable from the egregious facts in=20 Mills.  As the Directors point out, this case does not = involve=20 any directors who had an interest in, or stood to acquire an = interest in,=20 the acquiring company by virtue of the merger, i.e., there is no = evidence=20 Pate or Postl stood on both sides of the transaction.  = Instead,=20 Pate=3Ds and=20 Postl=3Ds alleged=20 interests were the change-in-control benefits and stock option=20 grants.  Simply because a director stands to gain financially = through=20 change-in-control benefits does not mean the director has a = financial=20 interest in the merger so that the board may not delegate = negotiating=20 authority to that director.  Cf. Wisconsin Inv. Bd. v.=20 Bartlett, No. C.A. 17727, 2000 WL 238026, at *6 (Del. Ch. Feb. = 24,=20 2000) (holding, unlike Mills, it was within = board=3Ds business=20 judgment to delegate authority to director to negotiate the = merger,=20 incentivized by a fee tied to the best result he could obtain for = all=20 shareholders). 

It was=20 within the board=3Ds business=20 judgment to delegate authority to Postl to negotiate with = Shell. =20 There is no evidence (1) the Directors completely abdicated their=20 responsibility of oversight of the negotiations to Postl and = Morgan=20 Stanley; (2) Pate or Postl controlled the rest of the Directors; = or (3)=20 Pate and Postl concealed certain information such as = merger-related=20 synergies or Pennzoil=3Ds=20 financial status for the first quarter of 2002 from the rest of = the=20 Directors. 

The=20 prefatory instruction not only tracks the language of section = 141(e), but=20 also contains the following additional language from Mills<