Explicit and Implicit Bundling in Shareholder Voting on Cleansing Acts
The 2015 Delaware Supreme Court decision in Corwin expanded the cleansing effect of a shareholder vote, thereby endowing shareholder votes with greater normative weight than at any time in the modern period. Outside the context of a conflicted transaction involving a controlling shareholder, a fully informed uncoerced disinterested shareholder vote on a transaction is treated […]
Marcel Kahan is the George T. Lowy Professor of Law and Edward B. Rock is the Martin Lipton Professor of Law at New York University School of Law. This post is based on their recent paper and is part of the Delaware law series; links to other posts in the series are available here.
The 2015 Delaware Supreme Court decision in Corwin expanded the cleansing effect of a shareholder vote, thereby endowing shareholder votes with greater normative weight than at any time in the modern period. Outside the context of a conflicted transaction involving a controlling shareholder, a fully informed uncoerced disinterested shareholder vote on a transaction is treated as a full defense against any claim for breach of fiduciary duty. With the benefit of a distance of ten years, was Corwin’s interpretation of the cleansing effect of a shareholder vote on a merger justified?
We argue that this weight is misplaced from an internal corporate law perspective and represents a departure from the traditional treatment of shareholder ratification. A vote by a majority of target shareholders in favor of a transaction can be seen at most as evidence that shareholders believe that the value of their shares will be higher if the transaction takes place than if it does not take place as of the time of the vote—but such a vote does not indicate fairness and should not substitute for a fairness analysis.
As a more rational regime, we suggest holding separate votes on the transaction and cleansing. This explicit private ordering bundling has several advantages over the present approach, which implicitly bundles the consummation of the transaction with the cleansing of fiduciary duty breaches by judicial fiat.
