Opinion ID: 2370284
Heading Depth: 3
Heading Rank: 1

Heading: The Doctrine of Shareholder Ratification

Text: Under current Delaware case law, the scope and effect of the common law doctrine of shareholder ratification is unclear, making it difficult to apply that doctrine in a coherent manner. As the Court of Chancery has noted in In re Wheelabrator Technologies, Inc., Shareholders Litigation: [The doctrine of ratification] might be thought to lack coherence because the decisions addressing the effect of shareholder ratification have fragmented that subject into three distinct compartments,... In its classic ... form, shareholder ratification describes the situation where shareholders approve board action that, legally speaking, could be accomplished without any shareholder approval.... [C]lassic ratification involves the voluntary addition of an independent layer of shareholder approval in circumstances where shareholder approval is not legally required. But shareholder ratification has also been used to describe the effect of an informed shareholder vote that was statutorily required for the transaction to have legal existence.... That [the Delaware courts] have used the same term is such highly diverse sets of factual circumstances, without regard to their possible functional differences, suggests that shareholder ratification has now acquired an expanded meaning intended to describe any approval of challenged board action by a fully informed vote of shareholders, irrespective of whether that shareholder vote is legally required for the transaction to attain legal existence. [52] To restore coherence and clarity to this area of our law, we hold that the scope of the shareholder ratification doctrine must be limited to its so-called classic form; that is, to circumstances where a fully informed shareholder vote approves director action that does not legally require shareholder approval in order to become legally effective. Moreover, the only director action or conduct that can be ratified is that which the shareholders are specifically asked to approve. [53] With one exception, the cleansing effect of such a ratifying shareholder vote is to subject the challenged director action to business judgment review, as opposed to extinguishing the claim altogether ( i.e., obviating all judicial review of the challenged action). [54]