As I have been doing, my friend Yale law professor Jon Macey has been following developments with respect to Delaware SB 21 closely. He posed a question that I found quite interesting and kindly gave me permission to pass it along to my readers.
SB 21 defines "fair to the corporation" as:
... the act or transaction at issue, as a whole, is beneficial to the corporation, or its stockholders in their capacity, as such given the consideration paid to or received by the corporation or its stockholders or other benefit conferred on the corporation or its stockholders and taking into appropriate account whether the act or transaction meets both of the following:
a. It is fair in terms of the fiduciary’s dealings with the corporation.
b. It is comparable to what might have been obtained in an arm’s length transaction available to the corporation.
It's not clear to me what work this provision does. As I explain in my article on SB 21, A Course Correction for Controlling Shareholder Transactions available at SSRN: https://ssrn.com/abstract=5022685, the common law defines fairness as having two components: fair dealing and fair price. The former goes to the process by which the transaction was proposed, approved, and consummated. The latter goes to the economics of the transaction. The review is not neatly bifurcated; rather, all aspects of the transaction must be considered together.
Accordingly, it seems as though SB 21 essentially tracks the existing common law. So why include it in the statute? What did the drafters intend?
One guess is that they don't want courts changing the definition of fairness so as to end run the statutory intent to insulate conflicted controlled transactions. But that doesn't make sense because SB 21 allows cleansing by disinterested directors or shareholders without regard to whether the transaction is fair. Fairness only comes into play as an alternative way of cleansing a conflicted transaction.
So I'm puzzled.
