Opinion ID: 2370284
Heading Depth: 3
Heading Rank: 2

Heading: Applying the Doctrine to the Shareholders' Approval of the Reclassification Proposal

Text: The Court of Chancery held that although Count III of the complaint pled facts establishing that the Reclassification Proposal was an interested transaction not entitled to business judgment protection, the shareholders' fully informed vote ratifying that Proposal reinstated the business judgment presumption. That ruling was legally erroneous, for several reasons. First, the ratification doctrine does not apply to transactions where shareholder approval is statutorily required. Here, the Reclassification could not become legally effective without a statutorily mandated shareholder vote approving the amendment to First Niles' certificate of incorporation. Second, because we have determined that the complaint states a cognizable claim that the Reclassification Proxy was materially misleading ( see Part II, supra, of this Opinion), that precludes ruling at this procedural juncture, as a matter of law, that the Reclassification was fully informed. Therefore, the approving shareholder vote did not operate as a ratification of the challenged conduct in any legally meaningful sense. [55] Alternatively, the defendants urge that, apart from ratification, Count III was properly dismissed because the Board was not interested, and that the Vice Chancellor's contrary ruling is erroneous. That argument lacks merit both procedurally and substantively. Procedurally it lacks merit because the Court of Chancery expressly determined that a majority of the Board was interested, and the Defendants have not cross-appealed from that ruling. Substantively, the argument lacks merit, because the defendants concede that Stephens and Csontos were interested in the Reclassification, and our earlier analysis of Kramer's alleged disloyalty with respect to Count I applies equally to Count III. [56] These allegations require that the Vice Chancellor's determination that a majority of the Board was interested be sustained. We conclude that the Court of Chancery erroneously dismissed Count III of the complaint.