Sanitizing Interested Transactions

Abstract

How should corporate law deal with a controlling person's entry into a transaction with the corporation she controls? How should corporate law deal with transactions or decisions where one or more board members are interested? In this Article, we argue that Delaware law could do a better job answering these questions than it presently does. We propose a modest strengthening ofjudicial review of interested transactions. For transactions where one or more directors have a conflicting interest and defendants attempt to cleanse the transaction using approval by the disinterested directors, we propose that the defendants show that the approving disinterested directors exercised independent business judgment. Only when the defendants make this showing would the transaction receive the protection of the business judgment rule. For all transactions with a controlling shareholder, the Weinberger entire fairness framework should apply. Since many duty of loyalty cases will be characterized as derivative actions, we would also revise the first prong ofAronson. We propose that if theplaintiffshows that at least one director is interested, demand is excused unless defendants show that the approving disinterested directors exercised independent businessjudgment and the plaintiffs cannot rebut that showing. If the plaintiffs can show that the transaction was with a controlling shareholder (as defined in the Weinberger line ofcases), demand should be