Waste of corporate assets crops up a lot these days as a residual standard of review. Consider, for example, shareholder ratification of conflicted controller transactions under MFW. See, e.g., City Pension Fund for Firefighters and Police Officers in City of Miami v. The Trade Desk, Inc., No. CV 2021-0560-PAF, 2022 WL 3009959, at *23 (Del. Ch. July 29, 2022) ("Under the version of the business judgment rule earned by proper implementation of the MFW framework, only a well-pleaded claim for waste may survive."). Similarly, where corporate action is ratified by shareholders under Corwin, the standard of review becomes "the irrebuttable business judgment rule," which "extinguishes all challenges to the merger except those predicated on waste." Larkin v. Shah, No. CV 10918-VCS, 2016 WL 4485447, at *7 (Del. Ch. Aug. 25, 2016).
To recover on a claim of corporate waste, the plaintiffs must shoulder the burden of proving that the exchange was “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” A claim of waste will arise only in the rare, “unconscionable case where directors irrationally squander or give away corporate assets.”
In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 74 (Del. 2006). As Chancellor Allen famously remarked:
There surely are cases of fraud; of unfair self-dealing and, much more rarely negligence. But rarest of all-and indeed, like Nessie, possibly non-existent-would be the case of disinterested business people making non-fraudulent deals (non-negligently) that meet the legal standard of waste!
Steiner v. Meyerson, No. CIV. A. 13139, 1995 WL 441999, at *5 (Del. Ch. July 19, 1995)
What happens if the shareholders ratify a transaction that would rise to the level of waste? In short, nothing unless the vote is unanimous.
... under an unbroken line of authority dating from early in this century, a non-unanimous, although overwhelming, free and fair vote of disinterested stockholders does not extinguish a claim for waste.
Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 882 (Del. Ch. 1999).
The unanimity requirement grew out of a distinction between void and voidable acts:
The essential distinction between voidable and void acts is that the former are those which may be found to have been performed in the interest of the corporation but beyond the authority of management, as distinguished from acts which are ultra vires, fraudulent or gifts or waste of corporate assets. The practical distinction, for our purposes, is that voidable acts are susceptible to cure by shareholder approval while void acts are not.
Id. at 895 n.58. Although that formulation seems to treat waste as a separate category from ultra vires acts, but the fact is that waste is rooted "in the ultra vires doctrine." Conte on behalf of Skechers U.S.A., Inc. v. Greenberg, No. 2022-0633-MTZ, 2024 WL 413430, at *12 (Del. Ch. Feb. 2, 2024). See also Huizenga, 751 A.2d at 895–96 (“The origin of this rule is rooted in the distinction between voidable and void acts, a distinction that appears to have grown out of the now largely abolished ultra vires doctrine.”).
As then-Vice Chancellor Strine noted in Huizenga, ultra vires is now largely a dead letter. As I explain in my book Corporate Law (Concepts and Insights):
If a corporation exceeded the powers and purposes set forth in the statutes or the firm’s articles, it was said to be acting “ultra vires.” ... The ultra vires doctrine frequently had inefficient (not to mention harsh and unfair) results. If one of the parties to an ultra vires contract later regretted its bargain, it could breach the agreement with impunity, even if the transaction had been completed. The doctrine was even less attractive in tort cases, where it was sometimes invoked as a defense against tort suits brought by those injured by corporate agents committing an ultra vires act.
To avoid such outcomes, courts began eviscerating the doctrine. Some courts limited the doctrine’s impact by broadly construing the corporation’s purpose and powers clause to encompass the transaction in question. Other courts enforced completed transactions by invoking such equitable doctrines as estoppel, quasi-contract, and waiver.
Given the evisceration of ultra vires, the survival of the requirement that ultra vires acts--including waste--receive unanimous shareholder approval to be ratified seems odd.
A second consideration is that in the modern public corporation, unanimity will be impossible to achieve. Granted, shareholder "turnout is generally high--the median turnout is 81.0%. However, ... almost 50% of meetings had turnout below 80% of shares outstanding." Scott Hirst, Frozen Charters, 34 Yale J. on Reg. 91, 102 (2017). Even if unanimity is defined as 100% of the shares presented and voted at the meeting rather than 100% of the outstanding shares, inevitably someone will vote no. Some may disapprove of the specific transaction, others may use the vote as an opportunity to register a protest over corporate policy generally, and still others may vote no simply for the pleasure of being obstreperous. Given the impossibility of achieving unanimity, what is the point of preserving the purported option of seeking shareholder ratification of alleged waste?
To be sure, if waste could be ratified by a non-unanimous shareholder vote, then there would be no residual opportunity for judicial review in cases governed by MFW or Corwin. In effect, shareholder ratification in such cases would make the underlying transaction unreviewable by courts. In addition, waste claims in general could be foreclosed by such a vote.
But this objection should not be given much weight. First, corporate law outside Delaware does contemplate that some transactions approved by the shareholders become non-reviewable. Under the MBCA, for example, ratification of a director's conflicted interest transaction renders self-dealing claims in connection with the transaction immune from judicial review.
Second, given that waste more closely resembles a crypto-zoological species than a legal doctrine, expending time and effort on waste claims would, for lack of a better word, wasteful. It would be the legal equivalent of mounting yet another search for the Loch Ness monster.
Third, as then-Vice Chancellor Strine noted in Huizenga:
... the transactions attacked as waste in Delaware courts are ones that are quite ordinary in the modern business world. Thus a review of the Delaware cases reveals that our courts have reexamined the merits of stockholder votes approving such transactions as: stock option plans; the fee agreement between a mutual fund and its investment advisor; corporate mergers; the purchase of a business in the same industry as the acquiring corporation; and the repurchase of a corporate insider's shares in the company. These are all garden variety transactions that may be validly accomplished by a Delaware corporation if supported by sufficient consideration, and what is sufficient consideration is a question that fully informed stockholders seem as well positioned as courts to answer.
Huizenga, 751 A.2d at 897.
Fourth, as Strine also noted, shareholder ratification speaks directly to the very definition of waste:
I find it logically difficult to conceptualize how a plaintiff can ultimately prove a waste or gift claim in the face of a decision by fully informed, uncoerced, independent stockholders to ratify the transaction. The test for waste is whether any person of ordinary sound business judgment could view the transaction as fair.
If fully informed, uncoerced, independent stockholders have approved the transaction, they have, it seems to me, made the decision that the transaction is “a fair exchange.”
Huizenga, 751 A.2d at 901.
It has been 26 years since Leo Strine proposed in Huizenga that we abolish the requirement that alleged waste receive unanimous approval. He was right back then. The case today seems even stronger. It's long past time for this change to be made. Approval by a majority of the independent and disinterested shareholders present and voting at a meeting should suffice.
