Post-Wheelabrator: Five Scenarios

To help break down Wheelabrator, as requested last class, consider the following scenarios, assuming that in each instance a majority of disinterested shareholders approved the transaction at issue after full disclosure. The following summarizes the possible effects we discussed:

1. Duty of Care violation: board failed to reach an informed business judgment (e.g., Van Gorkom). Claim is extinguished, so a plaintiff can only succeed by proving waste or gift. Note that waste or gift is only permitted with unanimous shareholder approval.

2. Lack of board authority (i.e., only shareholders could approve the item at issue). Claim extinguished. Later, proper approval by vote of shareholders ratifies (fixes) prior mistake.

3. Lack of adequate investigation and consideration by board (e.g., Van Gorkom). Subset of duty of care violation described in item 1 and claim cannot proceed.

4. Interested director. Again, where approved by disinterested shareholders, with approval, the burden shifts to the plaintiff who must overcome the business judgment rule, meaning that the plaintiff must prove waste, gift, or gross negligence). Thus, the loyalty exception to the BJR is eliminated. Ratification by disinterested shareholders makes it as though there were no conflict. This is the Wheelabrator in a nutshell.

5. Controlling shareholder. If the court determines that there is a controlling shareholder, which is definitely one with more than 50%, but possibly one with as little as 20%, then, even though the shareholders are disinterested (i.e., not officers or directors), the burden shifts to plaintiff and the standard is entire fairness. Compare Wheelabrator, where (on those facts) the court did not find that 22% ownership was a controlling shareholder.