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While the scope and application of the “business judgment” rule differ from stateto-state,there are five prerequisites that must generally be present before the rulewill apply:• There must be a business decision. The rule protects directors in connection withaffirmative decisions that comply with the rule, but not for inaction or generalfailures of oversight.• The directors must be disinterested. The rule protects directors who aredisinterested and independent, but not directors who appear on both sides of atransaction or who expect to derive any personal financial benefit from it.• The directors must act with due care. The rule protects directors who reach aninformed decision after making a reasonable effort to identify and evaluate allrelevant information reasonably available to them and who reasonably deliberatethe decision. 6• The directors must act in good faith. The rule protects directors who actwith a good faith belief that their business decision is in the best interests ofthe corporation.• The directors must not abuse their discretion. The rule protects directors againsthonest errors of judgment, but not for decisions that cannot be supported bysome rational basis and are egregious on their face.A plaintiff challenging a director’s decision bears the burden of proving that at leastone of those elements is not present. If a plaintiff is able to do so, the burden shifts tothe director to prove the “entire fairness” of the transaction. 7 This “entire fairness”standard can be a very high burden because the director must establish his or herutmost good faith and the most scrupulous inherent fairness of the transaction, bothin terms of fair dealing and fair price. 8 A director’s subjective belief as to the fairness ofa transaction is not sufficient for this purpose.6 See, e.g., Smith v. Van Gorkom, 488 A.2d 858(Del. 1985).7 Grobow v. Perot, 539 A.2d 180 (Del. 1988).8 Cede & Co. v. Technicolor, Inc., 634 A2d 345(Del. 1993).9 In re Walt Disney Co. Derivative Litig., 825 A.2d275 (Del. Ch. 2003).10 In re The Walt Disney Company DerivativeLitigation, 2005 Del. Ch. LEXIS 113 (Aug. 9,2005)11 Id.Board decisions regarding executive compensation have become one of the morefrequently litigated issues under the “business judgment” rule in recent years. Theprotracted and highly-publicized litigation challenging Disney’s payment of severancecompensation to Michael Ovitz is reflective of the trend of increased litigationregarding compensation arrangements that are or appear to be excessively generousor poorly structured. In a commonly-cited pre-trial opinion, the Delaware ChanceryCourt held that the “business judgment” rule did not protect Disney’s directors fromallegations that they failed to evaluate, negotiate or approve Ovitz’s employmentagreement. 9 Following a lengthy trial, the Court eventually ruled that Disney’s directorsdid in fact act in good faith and, therefore, were not liable. 10While the Court recognized that many aspects of Ovitz’s hiring and termination“reflect[ed] the absence of ideal corporate governance,” the court neverthelessultimately deferred to the directors’ good faith judgment. 117Financial institutions guide