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Supreme Court Clarifies Stockholder Ratification Law

Gantler v. Stephens, C.A. 132,2008 (Del. Jan. 27, 2009)

 

This is an important decision because it limits when stockholder approval of a transaction has the effect of ratifying director action. Moreover, it limits the effect of stockholder ratification by holding that the business judgment level of review still applies to the directors' action, rather than holding that ratification extinguishes any claim.

 

The ratification holding is that stockholder ratification only occurs when the stockholders approve a transaction that the directors are empowered to take without the approval of the stockholders. For example, because directors are able to issue stock without stockholder approval, the added approval of the stockholders would ratify their decision to sell stock. In contrast, because a merger already requires stockholder approval, the approval of the stockholders does not constitute "ratification" of the directors' decision to recommend the merger. They approve it but do not "ratify" it. How is that for a distinction?

 

The rationale for this tightly reasoned result lies in the difference under Delaware law between complying with a controlling statute's requirements to carry out a transaction and having a good reason for doing the transaction in the first place. In other words, in Delaware just because you have the power to act (the stockholders voted for it) does not mean you should act (a decision that is measured by Delaware's law of fiduciary duty).

 

This decision is also helpful in explaining when a director is interested in the vote to reject a merger proposal. To be interested, it is not enough that the director may lose his seat on the board if the merger goes through. In addition, he must have some outside business with the company that may be lost if there is a takeover to make him "interested' enough to escape the business judgment rule standard of review.

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