Brief Fact Summary. Plaintiff, Donald Lewis, brought a derivative suit against Defendants, the directors of S.L. & E, Inc. (SLE), for waste after Defendants did not raise the rent paid to SLE by a company, Lewis General Tires, Inc. (LGT), that Defendants also owned.
Synopsis of Rule of Law. Directors that have a conflict of interest in a corporate transaction have the burden to prove that no waste was committed.
When a shareholder attacks a transaction in which the directors have an interest other than as directors of the corporation, the directors may not escape review of the merits of the transaction.View Full Point of Law
Issue. The issue is whether Defendants have the burden to prove that there was no waste in the transaction wherein there was a conflict of interest.
Held. The burden is on a party who has a conflict of interest in a transaction to prove that there was no waste. Normally, the burden is high for the proof a complaining party has to offer to override a business judgment of a director, but when there is a conflict of interest, the burden is reduced. Because Defendants did not offer proof that there was no other tenant willing to pay more, or that the value of the rent was fair, the lower court holding was reversed.
Discussion. Common law will void transaction where there is a conflict of interest unless the party can affirmatively demonstrate that it was a fair transaction.