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Certain board members validated a loan to Gasoline, Ltd. as a fair transaction.
A corporation’s transaction with its insiders will be valid if intrinsically fair.
Gasoline, Ltd. was a Delaware corporation, with 50 percent of its shares owned by the Marciano (Plaintiff) faction and 50 percent by the Nakash (Defendant) faction. Each faction had three seats for a total of six members on the board. During Gasoline’s lifetime, the Nakashes (Defendant) extended a loan to Gasoline. Eventually, Gasoline became insolvent. Nakashes (Defendant) made a claim against the insolvent estate. The Marcianos (Plaintiff), arguing it was voidable per se as an interested transaction not approved by a majority of shareholders, challenged the claim. The Chancery Court validated the loan as inherently fair. Plaintiff appealed.
Will a corporation’s transaction with its insiders be valid if intrinsically fair?
(Walsh, J.) Yes. A corporation’s transaction with its insiders will be valid if intrinsically fair. Certain older precedents suggest that a corporation’s transaction with insiders, which is not approved by a majority of shareholders, will be per se voidable. However the weight of modern authority, which this court is inclined to follow, is that such a transaction will be valid if intrinsically fair. Delaware has enacted General Statutes S 144, which establishes certain conditions which, when met, will make an interested transaction valid. All parties concede that these conditions were not met here. However, the court believes that S 144 was not enacted to preempt the intrinsic fairness rule, but instead to create a “ . . . safe haven.â€Â In this case, the Chancery Court properly applied the intrinsic fairness rule. Affirmed.
At early common law, interested transactions were looked upon with great disfavor. Generally, they were held to be void ab initio or voidable per se. The more common rule today, either by statute or judicial decision, comports with the rule stated here.