Schreiber v. Carney
447 A.2d 17, 1982 Del. Ch. LEXIS 395 (1982)
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Rule of Law:
A vote-buying agreement is not illegal per se; rather, it is a voidable transaction that can be ratified by a majority of independent, fully-informed stockholders if the agreement's object or purpose is not to defraud or disenfranchise other stockholders.
Facts:
- Texas International Airlines, Inc. ('Texas International') proposed a corporate restructuring through a merger with a new holding company, Texas Air Corporation.
- The merger required approval from four different classes of stock.
- Jet Capital Corporation ('Jet Capital'), which owned all the shares of one of the required voting classes, possessed the power to unilaterally block the entire merger.
- Jet Capital stated it would vote against the merger, which it otherwise found beneficial, because the transaction would trigger a significant income tax liability for Jet Capital related to its stock warrants.
- To overcome Jet Capital's opposition, an independent committee of Texas International's board negotiated a loan of approximately $3.3 million to Jet Capital at 5% interest.
- The loan enabled Jet Capital to exercise its warrants before the merger, thereby avoiding the adverse tax consequences, which in turn caused Jet Capital to withdraw its opposition and vote for the merger.
- The loan agreement and all relevant details were fully disclosed in a proxy statement to all shareholders.
- A majority of all shareholders, and crucially, a majority of the disinterested shareholders (excluding Jet Capital), voted to approve both the loan and the merger.
Procedural Posture:
- Leonard I. Schreiber, a stockholder, filed a stockholder's derivative action in the Delaware Court of Chancery on behalf of Texas International Airlines, Inc.
- The lawsuit named Texas International, Jet Capital Corporation, and Texas International's board of directors as defendants.
- The complaint challenged a loan from Texas International to Jet Capital, alleging it constituted illegal vote-buying and corporate waste.
- Subsequent to the events in question but before the lawsuit was filed, Texas International merged with Texas Air, and Schreiber's shares were converted.
- The plaintiff and defendants both filed cross-motions for summary judgment, bringing the matter before the court for a ruling on those motions.
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Issue:
Is a vote-buying agreement, which is entered into for a purpose that does not defraud or disenfranchise other stockholders and is subsequently ratified by a majority of disinterested stockholders, void as a matter of public policy?
Opinions:
Majority - Hartnett, V.C.
No, a vote-buying agreement is not void per se if its purpose is not to defraud or disenfranchise other stockholders. The court acknowledged that while older cases treated any form of vote-buying as contrary to public policy and therefore illegal per se, this view is obsolete in the context of modern corporations. The court reasoned that the old rule was based on the impractical theory that every stockholder is entitled to the independent, unbiased judgment of every other stockholder. Modern Delaware law, exemplified by statutes and cases like Ringling Bros., allows stockholders wide latitude in entering into voting agreements. Therefore, the legality of such an agreement must be examined based on its object or purpose. In this case, the loan's purpose was to facilitate a beneficial corporate merger for the good of all shareholders, not to defraud them. Because the agreement was not intended to disenfranchise anyone and was fully disclosed to and ratified by a majority of the disinterested stockholders, the transaction's voidable nature was cured, and it is not void as a matter of public policy.
Analysis:
This decision marks a significant evolution in Delaware corporate law by rejecting a rigid per se rule against vote-buying in favor of a more flexible, purpose-oriented analysis. By classifying such agreements as voidable rather than void, the court empowers disinterested shareholders to ratify transactions that benefit the corporation, even if they involve providing consideration for a specific vote. This ruling provides corporate planners with a potential tool to overcome opposition from a single, powerful shareholder, provided the process is transparent and the ultimate goal is to advance the collective interests of all shareholders, subject to a test of intrinsic fairness.
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