As regular readers know, I am enjoying parsing the exciting new paper from Lawrence Hamermesh, Jack B. Jacobs, and Leo E. Strine (hereinafter HJS), Optimizing The World’s Leading Corporate Law: A 20-Year Retrospective and Look Ahead. In a prior post, I discussed their proposals for judicial review of controller transactions. In the course of doing so, I noted that when the conflict of interest transaction is to be cleansed by a shareholder vote, I observed that "I would allow the interested shareholder to vote (but that's a story for another post)." Herewith that other post.
HJS opine that "the cleansing vote must be one of only the disinterested stockholders," citing for that proposition "Fliegler v. Lawrence, 361 A.2d 218, 221-22 (Del. 1976) (failing to accept cleansing effect of a shareholder vote because less than a majority of the votes cast were from disinterested shareholders)."
My objection is that Fliegler was wrongly decided.
In Fliegler v. Lawrence, the defendants relied on DGCL § 144(a)(2) in arguing that shareholder approval relieved defendants of the common law obligation to prove the transaction’s fairness. DGCL 144(a)(2) provides that a conflicted interest transaction "between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because any such director’s or officer’s votes are counted for such purpose, if: ... (2) The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders ...."
The court agreed that shareholder ratification of a conflicted interest transaction shifted the burden of proof from the defendants to the objecting shareholders. On the facts of this case, however, the burden would not shift. A majority of the shares voted in favor of the transaction had been cast by the interested defendants in their capacities as Agau shareholders. In the court’s view, those votes should not count. Instead, only the votes cast by disinterested shareholders count and only the vote of a majority of such disinterested shareholders has the desired burden-shifting effect.
The court’s reading of § 144 is inconsistent with a plain-meaning approach to statutory construction. Section 144(a)(1) requires approval by “a majority of the disinterested directors,” but § 144(a)(2) requires only approval by a “vote of the shareholders.” The statute’s drafters thus inserted a requirement of disinterest in (a)(1) but not in (a)(2). Presumably, they did not forget the word disinterested in the presumably brief interval between writing (a)(1) and (a)(2). Accordingly, on the face of the statute, shareholder approval ought to be effective even if the shareholders are not disinterested.
Turning to policy, even if Fliegler were correctly decided, it applies only to cases under DGCL 144, which applies only to transactions involving a conflict of interest on the part of a director or officer.
As to controlling shareholders, even Massachusetts--which has gone the furthest in imposing fiduciary duties on controlling shareholders of close corporations--acknowledges that controllers have "certain rights to what has been termed ‘selfish ownership’ in the corporation." Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 663 (Mass. 1976).
Perhaps anticipating that principle, it was said in Ringling Bros-Barnum & Bailey Combined Shows v. Ringling, 53 A.2d 441, 447 (Del.1947) that:
Generally speaking, a shareholder may exercise wide liberality of judgment in the matter of voting, and it is not objectionable that his motives may be for personal profit, or determined by whims or caprices, so long as he violates no duty to his fellow shareholders....
My friend and mentor, the great corporate law scholar Michael Dooley, cited that case for the proposition that "shareholder autonomy [is] an independently important value in corporate law." Michael P. Dooley, Two Models of Corporate Governance, 47 Bus. Law. 461, 495 (1992).
