Marciano v. Nakash
1987 Del. LEXIS 1312, 535 A.2d 400 (1987)
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Rule of Law:
An interested director transaction that does not satisfy the safe harbor provisions of 8 Del. C. § 144 is not per se voidable. Such a transaction can be upheld if the interested director defendants prove the transaction was intrinsically fair to the corporation.
Facts:
- The Marciano family and the Nakash family each owned 50% of Gasoline, Ltd. and held equal representation on its board of directors, leading to a management deadlock.
- The Marcianos refused to participate in personally guaranteeing loans for Gasoline, citing dissatisfaction with the Nakashes' management.
- In response, the Nakashes withdrew their personal guarantees, which caused Gasoline's primary lender, Israel Discount Bank, to terminate its financing.
- To prevent Gasoline from becoming insolvent, the Nakashes, without consulting the Marcianos, personally advanced approximately $2.3 million to the corporation to pay bills and acquire inventory.
- Subsequently, the Nakashes had their wholly-owned entity, U.F. Factors, assume the loans to Gasoline at an interest rate of one percent over prime, plus a one percent fee to the Nakashes for their personal guarantee.
- These transactions were not approved by a majority of Gasoline's directors or shareholders due to the existing deadlock.
Procedural Posture:
- The Marcianos initiated an action in the Delaware Court of Chancery seeking the appointment of a custodian for Gasoline, Ltd. due to director deadlock.
- The Court of Chancery appointed a custodian, who later recommended the corporation's liquidation.
- The court approved a liquidation plan, during which the Nakashes asserted a claim for approximately $2.5 million for loans they and their entities made to Gasoline.
- The Marcianos objected to this claim in the Court of Chancery, arguing the underlying loans were voidable as improper self-dealing transactions.
- The Vice Chancellor of the Court of Chancery conducted an evidentiary hearing and ruled that the loans were valid and enforceable because they were intrinsically fair to Gasoline.
- The Marcianos (appellants) appealed the Vice Chancellor's decision to the Supreme Court of Delaware, with the Nakashes as appellees.
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Issue:
Does the common law principle of intrinsic fairness allow for the validation of an interested director transaction even when the safe harbor provisions of 8 Del. C. § 144 are not satisfied due to shareholder and director deadlock?
Opinions:
Majority - Walsh, Justice.
Yes, an interested director transaction can be validated by a judicial determination of its intrinsic fairness, even if it does not satisfy the statutory safe harbors. The court rejected the Marcianos' argument that interested transactions are per se voidable under common law if not cleansed under 8 Del. C. § 144. Citing Fliegler v. Lawrence, the court affirmed that § 144 is not the exclusive means of validating an interested transaction; it merely removes the 'interested director' cloud but does not preempt the common law fairness review. The intrinsic fairness test remains essential, particularly in situations like a shareholder deadlock where the ratification mechanisms of § 144 are realistically unavailable. Under this test, established in cases like Weinberger v. UOP, Inc., the interested directors bear the burden of proving the 'utmost good faith and the most scrupulous inherent fairness of the bargain.' Here, the Nakashes met this burden because the loans were made in a good faith effort to keep the corporation viable, were essential for its survival, and the terms were comparable to those previously offered by an independent, third-party bank.
Analysis:
This decision clarifies that 8 Del. C. § 144 is not the exclusive path for validating a self-dealing transaction. By preserving the common law 'intrinsic fairness' test as an alternative, the court provides a vital judicial backstop for transactions that, for legitimate reasons like corporate deadlock, cannot be cleansed through formal director or shareholder approval. This reinforces the principle that the ultimate judicial concern is the substantive fairness of the transaction to the corporation, not merely procedural compliance. The ruling ensures that directors acting in good faith to save a deadlocked corporation can have their actions upheld, provided they can meet the high burden of proving the transaction's entire fairness.
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