Speaking with Complete Candor: Shareholder Ratification and the Elimination of the Duty of Loyalty

Under their fiduciary obligations, directors must act with complete loyalty to the companies they manage. This duty prohibits selfdealing by directors unless the transaction is fair to the corporation. Delaware courts have, however, weakened this standard by providing that self-dealing transactions approved by "disinterested" and informed shareholders are subject to the business judgment rule and can only be challenged for waste, which is virtually impossible to prove. The effect has been to eliminate fairness as a component of the duty of loyalty.

This approach is inappropriate because "disinterested" approval does not eliminate interested influence, something not true in the context of the duty of care and the business judgment rule. The approach is also inappropriate because the courts have not taken adequate steps to insure that shareholders are "informed" at the time of voting. Courts characterize information that would be important to a reasonable investor as immaterial. Given these problems, the courts should return fairness to the analysis and, in the event of disinterested shareholder approval, shift the burden to the plaintiff to show that the transaction is unfair.