Marciano v. Nakash

Delaware Supreme Court · Corporations

CorporationsInterested director transactionsIntrinsic fairnessSection 144self-dealinginterested directorsintrinsic fairnessentire fairness

Facts

Gasoline, Ltd. was owned 50/50 by the Marcianos and the Nakashes, and board deadlock led to appointment of a custodian and then liquidation. After a bank terminated Gasoline's financing when the Nakashes withdrew their personal guarantees, the Nakashes advanced about $2.3 million of personal funds to Gasoline and later had their affiliated entity, U.F. Factors, assume and continue the lending on terms of one percent over prime plus a one percent guarantee fee. These loans were interested transactions because the Nakashes acted on both sides and no disinterested board or shareholder approval was possible due to deadlock. In liquidation, the Marcianos argued the debt was voidable as a matter of law or, alternatively, not shown to be fully fair.

Issue

Whether an interested director loan transaction is automatically voidable when the approvals contemplated by 8 Del. C. § 144 are unavailable, or whether the transaction may still be upheld if the interested directors prove intrinsic fairness. Also, whether the record supported the Court of Chancery's finding that the Nakashes' loans to Gasoline were fully fair.

Rule

Under Delaware law, Section 144 does not provide the exclusive method for validating interested director transactions. Even when the statute's approval mechanisms are unavailable, an interested transaction is not void solely because of the conflict if, upon judicial review, the interested directors carry the burden of proving utmost good faith and the transaction's intrinsic or entire fairness to the corporation; however, approval by fully informed disinterested directors or shareholders under Section 144 invokes business judgment review rather than fairness review.

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

Lakefront Outdoor Gear, Inc., a Delaware corporation based in Milwaukee, is owned 50/50 by two investor groups that are deadlocked at both the board and shareholder levels. To prevent vendors from cutting off shipments, director Omar Vega causes his wholly owned finance company to lend the corporation money on terms roughly matching what the company had previously obtained from an unrelated lender, but no disinterested approval is possible because of the deadlock.

If the non-lending faction challenges the debt solely because no approval under Delaware's interested-director statute was obtained, how should a court most likely rule?

Explanation. The majority opinion holds that Section 144 is not the exclusive means of validating an interested-director transaction. When statutory approval mechanisms are unavailable, such as because of deadlock, the transaction is not void solely due to the conflict if the interested fiduciary carries the burden of proving utmost good faith and intrinsic or entire fairness. (Derived from Marciano v. Nakash (n.d.).)