biz org class 14

DE s. 144: the interested investor statute
NYS s. 713

when there is a conflict of interest, what is the effect of the conflict of interest?
what happens as a matter of procedure?

when the court finds a conflict of interest, the burden is shifted from the plaintiffs to the defendant directors.
if the court found no conflict of interest, the business judgment rule would apply and there would be no redress for fairness because the court would defer to the business on a presumption that the directors acted objectively.

ratification of the board's decisions will shift the burden of proof back to the plaintiffs.

see DE s. 144(a)(2), interested shareholder ratification has no impact on the burden of proof.

fairness: if you have a conflict of interest, and there's no disinterested ratification, because of the conflict, the defendant has to prove that it's intrinsically fair.

how can a shareholder be disinterested in a transaction?

disinterested are not contracting with the corporation, but interested shareholders are. While all are "interested" in the corporation, interested for this purpose means is interested in the transaction that causes the conclict of interest. So in Fiegler, the board was "interested" nto because of there interest in Agau but because of their interest in USAC. By virtue of their involvement with USAC they stood to profit from contracting with AGAU. Because of this, they had a conflict of interests meaning they potentially may have breached the duty of loyalty they owed to Agau. The "disinterested" shareholders were those who were shareholders in Agau, but did not stand to profit from the USAC end of the transaction, therefore their only loyalties were to AGAU

wheelbrator.
wheelbrator goes from inactive shareholder to major shareholder. teh company waste became a controlling shareholder.
the wheelbrator board seemed to do all the right things. the disinterested directors (non-waste directors) unanimously approved the deal that lead to waste becoming a 55% shareholder. it was only after the unanimous directors that approved the waste directors. and once they all approved, they approved the deal.

with wheelbrator, we're just concerned about what the board did after approving. the board thought that director approval wasn't enough, so it sought shareholder ratification. Wade thinks the board was right about that because the board lacks true independence. wheelbrator tells us what the substance of the burden of fairness is.

whenever there's disinterested shareholder ratification, we must ask, "with whom did the corp deal? who is conflicted?" from wheelbrator, we know if the challenge is between the corp and a director -- then business judgment rule applies. if htere's disinterested shareholder ratification, the plaintiff shareholders must show waste. that will bring the business judgment rule back into question. additionally, wheelbrator takes us out of the statute (DE 144/ NYS 713). the other part of wheelbrator holding asks, "with whom is the company contracting? is it with a controlling shareholder? if so, the burden of proof shifts back to the shareholder, but the plaintiff just has to show that the transaction was unfair. conflicting/controlling shareholders is under common law with the wineburger case.

with respect to the wheelbrator case, the case was ratified. there was disinterested shareholder ratification, so the burden of proof shifted to the plaintiffs. so what's the standard? does the plaintiff have to show fairness or waste?

not dealing with a shareholder who contracted with the company. we're looking at wheelbrator's conduct, and it's conflicted -- it's not independent of waste. so there is a conflict as to the board.

good faith -- read the paragraph in the casebook on what good faith is supposed to mean.

in re disney.
there's a gap between conduct that satisfies the duty of care, conduct deserving of business judgment rule protection, and what constitutes best practices.