THE CLEANSING EFFECT OF A STATUTORILY REQUIRED SHAREHOLDER VOTE ON A TROUBLED TRANSACTION
Delaware law has long recognised that the uncoerced vote of fully informed stockholders can cure even the most questionable of self-interested transactions. This policy is enforced through the standard of review Delaware courts use to judge these otherwise interested transactions. This article discusses Delaware’s increasing comfort with the curative powers of fully-informed stockholder votes, as evidenced by the Delaware Supreme Court’s recent decision in Corwin v. KKR Financial Holdings, LLC, in which the Court extended deferential judicial review to transactions approved by a majority of disinterested stockholders, even where the stockholder vote was statutorily required. Corwin exemplifies the sanitising benefits of a vote – even when the company did not call the vote for its sanitising effect.
Delaware’s standards of judicial review
The standard of review determines the deference the court will apply in reviewing a challenged transaction and is often outcome determinative. Thus, the application of the appropriate standard of review is “essential to a proper judicial review of challenges to the decision-making process of a corporation’s board of directors”. Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 927 (Del. 2003). Delaware courts employ three levels of judicial review: (i) the business judgment rule; (ii) enhanced scrutiny; and (iii) entire fairness.
The business judgment rule, the most deferential standard, reflects the “cardinal precept of the General Corporation Law of the State of Delaware... that directors, rather than shareholders, manage the business and affairs of the corporation”. As such, under the business judgment rule, Delaware courts will uphold corporate decisions “absent an abuse of discretion”. However, a plaintiff may rebut the business judgment rule in various ways, including by showing that a controlling stockholder stood on both sides of the transaction, a majority of the board was interested in a particular transaction or lacked independence, or that the board failed to act in good faith in approving the transaction. Id.; see also eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 36 (Del. Ch. 2010).
Jan-Mar 2016 issue