Corporate Governance

Fiduciary Duties of Officers and Directors: Gantler v. Stephens (The Supreme Court Again Misreads Section144)(Part 8)

By J. Robert Brown

We are examining the recent decision by the Delaware Supreme Court in Gantler v. Stephens.

One of the oddest confusions in Delaware law is the improper reliance on Section 144 to determine the standard of review for conflict of interest transactions involving directors.  8 Del. C. § 144.  Some courts in Delaware have concluded that approval consistent with the requirements of Section 144 results in the application of the business judgment rule.  There are two problems with this approach.  First, Section 144 was adopted not to determine that standard of review but to render conflict of interest transactions not voidable.  While there may be reasons to apply the business judgment rule to some transactions approved in a manner consistent with Seciton 144 (although, as this paper demonstrates, Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty, they are not good ones) they are not found in Section 144.

Second, the terms of Section 144 do not provide adequate protection for shareholders to justify the application of the business judgment rule.  Thus, Section 144(a)(2) provides that a contract is not voidable if the material facts are disclosed and the transaction is "approved in good faith by vote of the shareholders;"  In other words, the provision provides that whatever protection is accorded under Section 144, it comes from the approval of all shareholders (not just disinterested shareholders). 

Yet in Gantler, the Court, in discussing shareholder ratification, noted that its decision only applied to "the common law doctrine of shareholder ratification."  It was not "intended to affect or alter our jurisprudence governing the effect of an approving vote of disinterested shareholders under 8 Del. C. § 144."  But as the quoted language above demonstrates, Section144 does not require disinterested shareholder approval (it does provide for disinterested director approval, see 8 Del. C. § 144(a)(1)).  In other words, shareholder approval is a common law graft onto the statute.  The language of the statute itself does not support it.

Primary materials from the Chancery Court can be found on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 19, 2009 (boomark / email).