Puma v. Marriott

Delaware Court of Chancery · 1971 · Corporations

283 A.2d 693 (Del. Ch. 1971)

Updated August 22, 2026

CorporationsInterested-director transactionsBusiness judgment ruleDerivative suitsderivative actioninside directorsoutside directorsentire fairness

Facts

Marriott acquired all the stock of six property companies that owned or leased real estate used by Marriott, issuing 313,000 shares of Marriott stock to members of the Marriott family and others whose property-company stock was acquired. Four family members were Marriott directors, but the acquisition was authorized by Marriott's outside directors, whose independence, integrity, and good faith were not challenged, after they obtained appraisals, analyst valuations, and advice from independent counsel, tax experts, and accountants. The outside directors approved the transaction to sever potential conflicts of interest and facilitate New York Stock Exchange listing. Plaintiff claimed the property companies were overvalued, Marriott stock was undervalued, and Marriott also wasted assets by immediately paying an acquired interest-free debt owed to Alice Marriott.

Issue

Whether Marriott's acquisition of property companies owned principally by insider family members should be reviewed under the entire fairness standard or under the business judgment rule when independent outside directors approved the transaction. Also, whether Marriott's immediate prepayment of the acquired Brentwood obligation constituted waste of corporate assets.

Rule

The entire fairness standard applies when the persons who control the making of a transaction and the fixing of its terms are on both sides of the deal. But where there is no showing that the insiders dominated the independent outside directors or dictated the transaction's terms, and no showing of fraud or bad faith, the applicable standard is the business judgment rule, under which the court will not substitute its judgment for that of experienced independent directors.

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

Cascade Dining Group, a Delaware corporation based in Seattle, proposes to buy warehouse entities owned by its founder family, who collectively hold 43% of Cascade's stock and have three seats on a nine-member board. The other six directors are unaffiliated outsiders; their independence and good faith are not challenged, they hire independent appraisers and financial analysts, and there is no evidence the family dictated price or terms.

In a derivative suit challenging the acquisition, which standard of review should a court most likely apply?

Explanation. The lead opinion applies entire fairness only when the persons who control the making of the transaction and the fixing of its terms are on both sides. Where independent outside directors approved the deal, their independence and good faith were unchallenged, and there was no showing the insiders dominated them or dictated terms, the business judgment rule governs absent fraud or bad faith.