Stockholder Ratification Doctrine
For anyone with more than a passing familiarity with the law of agency, stockholder ratification doctrine will sound very familiar. As you remember in the Restatement (3rd) of Agency, §8.06 conduct by an agent that would otherwise constitute a breach of a fiduciary duty does not constitute a breach of duty if the principal consents to the conduct, provided that the agent acts in good faith, discloses all material facts that the agent knows, has reason to know, or should know would reasonably affect the principal's judgment, and the agent otherwise deals fairly with the principal. Full and adequate disclosure of an agent's actions followed by knowing and uncoerced assent by the principal in effect cleanses the otherwise disloyal acts of an agent.
In the context of the corporate law, common law courts have adopted a very similar approach to the unauthorized acts of boards, or agents of the corporation. For example, self-dealing by a board will, upon a stockholder challenge, be subject to the stringent entire fairness standard with the board bearing the burden of proving that it dealt fairly with the corporation. However, where the material facts about those acts are fully disclosed to the stockholders and disinterested stockholders have an uncoerced opportunity to vote ‘yay or nay' on those actions, board actions so approved by the disinterested stockholders will be granted the deference of business judgment rather than be subject to entire fairness review.
Although in a successful ratification case, the board is not required prove entire fairness, in order to establish that the ratification is effective, the board is required to bear the burden of proving that it disclosed to stockholders all the material facts related to the challenged transaction available to it at the time.
Once a board has successfully established that stockholder ratification the effect of such ratification is to shift the substantive test on judicial review of the act from one of fairness to one of “corporate waste”.
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