Michelson v. Duncan

Supreme Court of Delaware · 1979 · Corporations

407 A.2d 211 (1979)

Updated August 22, 2026

CorporationsShareholder ratificationStock optionsWaste of corporate assetsderivative suitstock option planvoidable actsvoid acts

Facts

HFC shareholders approved a 1966 stock option plan under which key employees, including some directors, could buy stock at 90% of market price subject to annual grant and exercise limits. From 1971 to 1974, the board increased the annual exercise rate, and in 1974, after a sharp decline in HFC's stock price, cancelled existing options and issued new options at lower exercise prices, while also issuing additional new options. Plaintiff's complaint challenged post-1973 options on two grounds: the board lacked authority to modify the plan without shareholder approval, and the new options were granted without consideration. In 1977, HFC shareholders ratified the challenged board actions by a non-unanimous vote after receiving proxy materials describing the transactions and the lawsuit.

Issue

Whether the 1977 non-unanimous shareholder ratification entitled defendants to summary judgment on plaintiff's challenges to the amended stock option plan and option grants. Also, whether plaintiff had stated and preserved a claim that the option grants were gifts or waste of corporate assets for lack of consideration, and what effect ratification had on that claim.

Rule

A valid shareholder ratification by a majority of fully informed stockholders cures prior voidable acts of directors, including acts beyond management's authority, and relates back to extinguish claims based on lack of authority. But non-unanimous shareholder ratification does not cure void acts such as gifts or waste of corporate assets, fraud, or ultra vires acts. In a stock option case, allegations that options were granted for no consideration are sufficient to state a claim for gift or waste; after valid shareholder ratification, the burden of proving want or inadequacy of consideration shifts from defendants to plaintiff.

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Summit Ridge Systems, a Delaware corporation based in Denver, adopted an executive bonus-stock plan approved by shareholders in 2018. In 2024, the board accelerated vesting terms in a way arguably not authorized by the plan, and six months later a majority of fully informed disinterested shareholders ratified the board’s action after receiving proxy materials describing the changes and the pending derivative suit.

A shareholder sues derivatively, claiming only that the board lacked authority under the original plan to accelerate vesting. What is the strongest argument for the corporation?

Explanation. A majority of fully informed stockholders may ratify voidable director acts, including acts beyond management’s authority but undertaken in the corporation’s interest. Such ratification relates back and extinguishes claims based on prior lack of authority. Unanimity is not required for voidable acts.