In Re Wheelabrator Technologies, Inc. Shareholders Litigation
663 A.2d 1194, 1995 WL 496771 (1995)
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Rule of Law:
A fully informed vote by disinterested shareholders ratifying a transaction extinguishes claims for breach of the duty of care. However, such a vote does not extinguish claims for breach of the duty of loyalty; instead, it changes the standard of judicial review to the business judgment rule in cases where there is no controlling shareholder.
Facts:
- In 1988, Waste Management, Inc. ('Waste') acquired a 22% equity interest in Wheelabrator Technologies, Inc. ('WTI'), becoming its largest shareholder.
- As part of the 1988 transaction, Waste was entitled to nominate four of WTI's eleven directors.
- In December 1989, due to concerns about potential conflicts of interest for the Waste-designated directors, the two companies began discussing a transaction for Waste to either acquire a majority stake in WTI or divest its interest.
- On March 22, 1990, Waste proposed a no-premium, stock-for-stock merger to become WTI's majority (55%) shareholder, which WTI's representatives rejected.
- On March 23, 1990, the parties agreed in principle for Waste to acquire a 55% stake in WTI through a stock-for-stock merger that included a premium for WTI shareholders and would be conditioned on approval by a majority of WTI's disinterested shareholders.
- Over the next week, the parties finalized the exchange ratio and negotiated five ancillary agreements beneficial to WTI.
- On March 30, 1990, WTI’s board met. The seven non-Waste-affiliated directors, after hearing from financial and legal advisors, unanimously approved the merger and recommended it to shareholders.
- On September 7, 1990, the merger was approved by a majority of WTI's shareholders, excluding Waste.
Procedural Posture:
- Shareholders of Wheelabrator Technologies, Inc. (WTI) filed a class action lawsuit in the Delaware Court of Chancery against WTI and its directors challenging a proposed merger.
- The plaintiffs' motion for a preliminary injunction to block the merger was denied.
- The merger was subsequently approved by a majority of WTI's disinterested shareholders.
- Plaintiffs filed a Second Amended Consolidated Class Action Complaint, alleging breaches of the duties of disclosure, care, and loyalty.
- Defendants' motion to dismiss was granted in part and denied in part, leaving the three aforementioned claims.
- Defendants then filed a motion for summary judgment on the remaining claims, which the Court of Chancery is now deciding.
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Issue:
Does a fully informed vote by a majority of disinterested shareholders ratifying a merger operate to extinguish claims against the directors for breaches of the duties of care and loyalty?
Opinions:
Majority - Jacobs, Vice Chancellor
No, a fully informed shareholder vote does not extinguish all fiduciary duty claims. It extinguishes claims for breach of the duty of care, but it does not extinguish claims for breach of the duty of loyalty. Instead, for loyalty claims not involving a controlling shareholder, the vote lowers the standard of judicial review to the business judgment rule. The court reasoned that a breach of the duty of care is a voidable act that can be cured, or extinguished, by a fully informed shareholder vote, as established in Smith v. Van Gorkom. In contrast, claims for breach of the duty of loyalty are not extinguished by shareholder ratification. The effect of ratification depends on the nature of the transaction. If the transaction is with a controlling shareholder, ratification shifts the burden of proof to the plaintiff, but the standard of review remains entire fairness, as held in Kahn v. Lynch. However, where the transaction involves an interested party who is not a controlling shareholder (as here, where Waste owned only 22%), a fully informed shareholder vote changes the standard of review to the business judgment rule, requiring the plaintiff to prove waste or a gift of corporate assets. Therefore, the duty of care claim is dismissed, but the duty of loyalty claim survives under the business judgment rule standard of review.
Analysis:
This decision provides a critical clarification of Delaware's corporate law on shareholder ratification. It establishes a clear doctrinal split in the effect of ratification on duty of care claims (which are extinguished) versus duty of loyalty claims (which are not). More significantly, the case creates a nuanced framework for analyzing duty of loyalty claims by distinguishing between transactions with controlling shareholders and those without. By applying the business judgment rule to ratified, non-controlling shareholder transactions, the court provides directors with significant protection while still allowing judicial review for waste, thus balancing director authority with shareholder protection.
