Entire Fairness | Brian JM Quinn | November 15, 2013

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Entire Fairness

Original Creator: Brian JM Quinn Current Version: Brian JM Quinn Show/Hide

When fiduciaries of the corporation lose the business judgment presumption, they will have to justify to the court that their actions were entirely fair to the corporation. A defendant director who bears the burden of proving its actions were entirely fair to the corporation has to bear a heavy burden. Unlike the business judgment presumption, which can a defendant can rely on to have a claim dismissed on the pleadings, when a defendant must bear the burden of proving the entire fairness of transaction, the defendant can only do that after a full trial. Consequently, losing the presumption of business judgment and being forced to prove at trial that the actions of the defendants were entirely fair to the corporation is often outcome determinative. Defendant directors will often seek to settle litigation rather than go to trial under the entire fairness standard.

In older cases, the “entire fairness” standard is also known as the “intrinsic fairness” standard or the “inherent fairness” standard.

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  1. 1 Show/Hide More Weinberger v. UOP, Inc.
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    In Weinberger, the court deals with a common loyalty problem. What are the fiduciary duties of a controlling stockholder in dealing with minority stockholders. In such situations, the controlling stockholder, because of her ability to control and direct management decisions of the corporation, has fiduciary obligations to deal with minority stockholders fairly. Transactions between the controller and the corporation will not receive the protection of the business judgment presumption.

    Rather, the controlling stockholder bears the burden of proving the fairness of its dealings with the corporation.  The entire fairness standard requires the court to examine two aspects of the board's dealings with the corporation: whether the board dealt fairly with the corporation and whether the challenged transaction was at a fair price to the corporation.

    As you read Weinberger, consider the facts and ask yourself if you were advising the controller how, if they were able to do things all over again, they might change things to make sure the actions of the controller and the board comported with the entire fairness standard as described by the court. 

  2. 2 Show/Hide More Sinclair Oil Corporation v. Levien
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    Stockholders do not normally have fiduciary duties with respect to other stockholders. This principle makes sense for a number of reasons. Stockholders with small stakes have no ability to influence the board of directors and therefore should be free from restrictions in their dealings with other stockholders.

    However, this principle is subject to an exception. When stockholders can, through their ownership position influence and control the direction of the corporation, then those stockholders have fiduciary obligations with respect to minority stockholders. As a result, in such circumstances, controlling stockholders will bear the burden of proving entire fairness when they engage in self dealing with the corporation.

  3. 3 Show/Hide More In Re Cornerstone Therapeutics
    Original Creator: Brian JM Quinn
    In many cases, the entire board is not guilty of a violation of the duty of loyalty. Rather, only one or two directors may have been alleged to have engaged in bad acts. Nevertheless, plaintiffs will often sue the entire board of directors. The question then arises whether when a plaintiff challenges an interested transaction that is presumptively subject to entire fairness review, must the plaintiff plead a non-exculpated claim against the disinterested, independent directors to survive a motion to dismiss by those directors? Or must those directors remain in the suit. The Cornerstone opinion provides some guidance on this question.
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May 18, 2017

fiduciary duty loyalty corporate

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