Publication Date
3-1-2023
Document Type
Article
Organizational Units
Sturm College of Law
Keywords
Corporate law, Shareholder rights, Shareholder ratification, Duty of loyalty
Abstract
Few corporate law doctrines matter more than the duty of loyalty. Designed to protect the shareholders from the consequences of improper self-dealing, the duty applies to transactions with the corporation that benefit officers, directors, or other fiduciaries.
Despite the central importance of fairness to the duty of loyalty, however, the trend has been to eliminate any analysis of fairness, replacing substantive review with procedural safeguards. This has been particularly true with respect to ratification by disinterested shareholders. If done properly, disinterested ratification results in the application of the business judgment rule. In those circumstances, courts will not examine the fairness of the transactions.
The wisdom of a policy allowing a majority of disinterested shareholders in a public company to consent to, and thereby immunize from challenge, self-dealing is questionable. Moreover, the procedural safeguards designed to ensure that shareholders are informed when they "ratify" the self interested transactions do not work. Informed shareholders must have all material information when consenting to the self-dealing. In practice, however, they often do not. Delaware courts repeatedly consider immaterial categories of information among the most important to shareholders in deciding how to vote.
This can be seen from a comparison between Delaware and federal cases interpreting the concept of materiality. Although both purport to use the same test (putting aside that Delaware still relies on the long rejected probability/magnitude test for the materiality of ongoing merger negotiations), it is clear that in application they do not. Delaware uses a far more restrictive concept of materiality, one that does not ensure that shareholders in fact have all material information needed to make informed decisions.
To the extent that substantive review gives way to procedural safeguards, the procedural safeguards must be meaningful. Meaningful safeguards require full disclosure. Yet at least in the area of disinterested shareholder approval, this has not occurred.
Publication Statement
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Originally published as Brown, Speaking with Complete Candor: Shareholder Ratification and the Elimination of the Duty of Loyalty, 54 Hastings L. Rev. 641 (March 2003).
Recommended Citation
Brown, Speaking with Complete Candor: Shareholder Ratification and the Elimination of the Duty of Loyalty, 54 Hastings L. Rev. 641 (March 2003).