Saxe v. Brady

Court of Chancery of Delaware · 1962 · Corporations

184 A.2d 602 (1962)

Updated August 22, 2026

CorporationsMutual fundsDirector fiduciary dutiesShareholder ratificationCorporate wastefiduciary dutyinvestment adviser feesmutual fund management contract

Facts

Fundamental Investors, Inc. was a Delaware open-end investment company whose adviser, Investment Management Company (IMC), received an annual fee equal to one-half of one percent of Fund's average daily net assets under a contract approved by stockholders in 1954 and again ratified in 1960 by 99.1% of shares voting. Plaintiffs challenged fees paid from 1955 through 1960, arguing that as Fund's assets grew to about $590 million, the dollar amount of the fee became legally excessive and resulted from fiduciary breaches by affiliated directors and colluding corporate defendants. Plaintiffs also attacked the 1960 proxy statement, claiming it misrepresented IMC's profits by using improper expense allocations between IMC and its parent, Long Inc. The opinion states that Fund's structure and the advisory contract complied with the formal requirements of the Investment Company Act, and plaintiffs did not assert a cause of action under that Act.

Issue

Whether the advisory fees paid by Fund to IMC from 1955 through 1960 were legally excessive so as to constitute waste of corporate assets. Also, whether the 1960 shareholder ratification was ineffective because the proxy statement materially misstated IMC's profits, such that defendants would retain the burden of proving fairness.

Rule

When stockholders validly ratify a transaction, interested parties are relieved of the burden of proving fairness, and the burden shifts to objecting stockholders to show waste. In a waste case, even after ratification, the court asks only whether what the corporation received was so inadequate in value that no person of ordinary, sound business judgment would deem it worth what the corporation paid; if reasonable businesspeople could differ, the transaction must be upheld.

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

Blue Mesa Income Fund, a Delaware corporation based in Denver, hires Summit Harbor Advisers, LLC to manage the fund for a flat annual fee of 0.5% of average daily net assets. At a shareholder meeting in Phoenix, 98% of the shares voting approve continuation of the contract after a proxy accurately discloses the fee, the adviser's affiliation with the distributor, and the adviser's reported profits.

A shareholder later brings a derivative suit in Delaware, alleging the fee is excessive because several comparable large funds in Boston and San Diego pay lower rates. Which burden of proof most likely applies?

Explanation. Under the majority opinion, effective stockholder ratification shifts the burden away from the interested parties. After adequate disclosure and ratification, the objecting stockholder must show waste—i.e., that the consideration received was so inadequate that no person of ordinary, sound business judgment could think it worth the price paid. Mere evidence that some competitors charge less does not keep the burden on defendants.