Fliegler v. Lawrence

Supreme Court of Delaware · 1976 · Corporations

CorporationsInterested director transactionsCorporate opportunityShareholder ratificationIntrinsic fairnesscorporate opportunityintrinsic fairnessentire fairness

Facts

Lawrence, Agau's president, acquired antimony properties personally and offered them to Agau, but Agau's board concluded that Agau was not financially or legally able to acquire and develop them at that time. The properties were instead transferred to USAC, a closely held corporation majority-owned by the individual defendants, and USAC granted Agau a long-term option to acquire all USAC stock in exchange for 800,000 shares of Agau restricted stock. The individual defendants were directors and officers of both corporations and therefore stood on both sides of the option transaction. After Agau's board voted to exercise the option and shareholders approved, the plaintiff challenged both the initial taking of the opportunity and the fairness of the exchange.

Issue

Whether the individual defendants wrongfully usurped a corporate opportunity belonging to Agau, and whether the exercise of Agau's option to acquire USAC for 800,000 Agau shares was an interested transaction that had to be justified as intrinsically fair. Also, whether shareholder approval shifted the burden away from the defendants under 8 Del. C. § 144(a)(2).

Rule

If fiduciaries stand on both sides of a corporate transaction, they bear the burden of proving its intrinsic fairness to the corporation. Shareholder ratification shifts that burden only when the transaction is approved by a majority of independent, fully informed shareholders; approval based primarily on interested shares does not freshen the atmosphere or alter the fairness inquiry. Section 144 does not grant broad immunity to interested transactions; it only prevents invalidation solely because of the conflict and leaves unfair transactions subject to judicial scrutiny. A corporate opportunity may be taken by fiduciaries after it is offered to the corporation and rejected when the corporation is financially or legally unable to accept it.

🔒

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.

Summit Ridge Minerals, Inc., a Delaware corporation based in Denver, was offered a lithium extraction lease in Nevada. After reviewing its finances and permit restrictions, the board concluded the company lacked both the cash and present legal ability to pursue the project, so its president, Elena Brooks, bought the lease personally and later parked it in a separate startup she controlled.

In a derivative suit claiming Brooks usurped a corporate opportunity, which is the strongest argument for Brooks under the governing rule?

Explanation. When a fiduciary first offers the opportunity to the corporation and the corporation is not in a position, financially or legally, to accept it, the fiduciary may acquire it after the corporation rejects it. The majority opinion treated inability to exploit the opportunity as critical. Good faith alone is not enough, unanimous shareholder waiver is not required by this rule, and the court's reasoning here did not turn on line-of-business formalism.