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An Introduction to the Law of Corporations: Cases and Materials, Fall 2017

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. The pernicious effect of such transactions caused legislatures to strictly regulate relationships between corporations and their directors. Through the early 20th century, transactions between a corporation and a director were considered void. Over the years, policy with respect to interested director transactions has loosened, but such transactions are still, rightly, looked at with suspicion.

Such transactions are no longer void per se. 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.  

Compliance with the requirements of Section 144 provides a board with a safe harbor only 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 and boards may be required to defend the transaction for violations of the duty of loyalty. 

The procedures for insulating interested director transactions from attack for purposes of Section 144 provide a partial roadmap for the related doctrine of stockholder ratification. Interested director transactions that comply with the requirements of stockholder ratification doctrine will not be subject to attack for potential violations of the duty of loyalty and will receive the benefit of the business judgment presumption.

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