Brief Fact Summary. Plaintiff, Irving Fliegler, brought a suit on behalf of Agau Mines, Inc., against Defendant directors, John Lawrence et al., after they voted to exercise an option to purchase shares of another company.
Synopsis of Rule of Law. Shareholder ratification of a transaction between the corporation and an interested party will not be legitimate if the majority of the shareholders are the interested parties.
Issue. The issue is whether a transaction is legitimately ratified by shareholders when a majority of shares are held by the directors.
Held. The burden of proof that the transaction was fair was still on the Defendant directors because the shareholder ratification was not legitimate. Defendants controlled a majority of the shares, and there was not enough proof that disinterested shareholders voted with the directors. However, Defendants did offer enough proof to demonstrate that the transaction was fair.
Discussion. Shareholder ratification can be used to switch the burden of proof back to a plaintiff to prove that a transaction was not legitimate. It therefore can reset the standard back to the business judgment rule.