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Introduction to the Law of Corporations: Cases and Materials

Sec. 144 Safe Harbor and Interested Director Transactions

During the 19th century, transactions between the corporation and its directors were commonplace. Such transactions often worked to the advantage of the interested director at the expense of the stockholder. Examples of interested director transactions include, the corporation purchasing materials from a director for use in producing the corporation's product. Alternatively, the corporation might sell corporate assets to a director. These kinds of self-dealing transactions with directors provide opportunities for directors to extract value from the corporation at the expense of the shareholders.  The pernicious effect of such transactions caused legislatures to strictly regulate relationships between corporations and their directors. As a result, through the early 20th century, transactions between a corporation and a director were deemed to be per se void.

Over the years, courts adopted common law exceptions to the per se policy against interested director transactions. These common law exceptions relied, in part, on devices that resembled common law ratification doctrines, including disclosure of the interested transaction followed by consent. Although public policy with respect to interested director transactions has loosened over the years, such transactions are still, rightly, looked at with suspicion. Section 144 provides for a statutory safe harbor for interested director transactions. Interested director transactions that comply with the requirements of Section 144 will not be considered void or voidable.  

While compliance with the requirements of Section 144 provides a board with a safe harbor against attacks for voidability, interested director transactions are still subject to attack for potential violations of the duty of loyalty. So, while the challenged transaction might not be void, it could still be unfair to the corporation, consequently boards may be required to defend the transaction on another basis. 

The procedures for insulating interested director transactions from attack rely heavily on two principles: disclosure and then uncoerced approval. As you will see disclosure of one's interest coupled with the consent of disinterested directors or stockholders has a very powerful cleansing effect.

Where a transaction has been cleansed pursuant to the requirements of the statute, then it will not be vulnerable to subsequent attack solely because of a director's interest. However, it is still vulnerable to attack for lack of fairness. 

The overlap between cleansing pursuant to Section 144 and the common law ratification doctrine is extensive, but not complete. We will compare the two in a subsequent section.