The Limits of Shareholder Ratification

Abstract

In this Article, I explore the expanding common law doctrine of shareholder ratification, whereby shareholder approval can, for all practical purposes, absolve directors of fiduciary liability for damages related to their conflicted business decisions. The Delaware Supreme Court now allows a shareholder vote to perform substantially more work than ever before. To take just one example, recent court decisions have extended shareholders’ cleansing power to third-party merger and acquisition transactions that would otherwise have been subject to heightened judicial scrutiny. Under prevailing law, in transactions between a company and any party other than a controlling shareholder, shareholder ratification reinstates the business judgment rule and makes it irrebuttable, other than for waste. Substantive judicial review is effectively avoided for such transactions.
Despite its extraordinary importance in corporate governance, the shareholder ratification doctrine’s foundations are feeble and its limits uncertain. Theoretically, there is no well-established basis for equating shareholder approval with either the informed, disinterested, and good faith decision of a board or judicial review. Doctrinally, the shareholder ratification doctrine’s expansion from its traditional context of self-dealing transactions has been a judicial innovation, rather than an elaboration of precedent. And historically, the shareholder ratification doctrine, which originated in early 20th century state interested-director statutes, was motivated by fairness principles that were lost in translation into the common law.
This Article recovers the fairness genealogy of the shareholder ratification doctrine and, in doing so, provides useful guidance for the doctrine’s development, limits, and application.

Keywords: Shareholder ratification; corporate governance; mergers and acquisitions