American Law On Directors' Self-dealing

At early common law, self-dealing transactions were automatically voidable at the election of the corporation even when the transaction was fair and approved by disinterested directors. Understanding deeply of human nature, trust principle and most scrupulous attitude to self-dealing dose make sense at early common law. Today, many state statutes recognize that self-dealing transactions absolutely voidable dose not meet the need of business, outright prohibition is not reasonable, interested director transactions are prevalent in today's corporate environment. At the beginning of the 20th century, this rule has changed slowly, if disinterested directors represent the interest of the corporation, then the transaction is absolutely fair, self-dealing transactions will not be automatically voidable. The Delaware General Corporation law,1931 Cal Civil Law, Model Business Corporation Act, ALI and state statutes assembly enacted a conflict-of-interest statute that provides "a safe harbor" for corporate boards to prevent director conflicts of interest from voiding corporate action. Markets are not perfect, nonintervention is not proper, that is the reason that American common law and statues regulate director'self-dealing.Rather than completely prohibiting self-dealing transaction, the majority of minority solution uses the voting mechanism to determine the group's consent by excluding those shareholders and directors with a conflict of interest from participating in the vote. This solution assumes that only the votes of the disinterested members of the group are relevant to determine the "group preference." If the remaining participants in the ballot (the minority) form a large group, it is reasonably assumed that the vote does, in fact, reflect the group preference. This ban on conflict-of-interest voting has two primary benefits. First, it prevents a self-dealer from imposing a transaction on an unwilling minority. Second, since such an approach is based upon consent, it is unnecessary to bring the transaction before the courts for an objective evaluation. Placing the decision making in the hands of the minority might, however, preclude efficient transactions in certain situations. For example, When the minority is composed of a small group, the threat of strategic voting increases. Since the interested majority obviously will support the transaction, the minority, or some of its members, can attempt to hold out for a larger piece of the transaction's expected profit. So long as the extorted sum leaves the majority with some amount of profit, the transaction may still be performed. But if the minority, or some of its members, pushes the holding-out attempt too far, an efficient transaction may be lost. Likewise, even a "reasonable" hold out will preclude a transaction if the interested majority refuses to concede to the opposing minority's demands for strategic reasons such as guarding its reputation. A solution based on the fairness rule assumes that, once self-dealing voting is permitted, the majority can force a transaction upon the minority. The protection afforded to the minority ensures only that a fair price is obtained, which is determined by evaluating the objective value of the transaction. The fairness rule establishes a regime of involuntary transactions, and, thus, replaces subjective valuations of the contending groups of shareholders with an objective measure. If the power to determine whether or not a transaction will be approved is given to the minority, the majority is unable to force a deal upon the minority. Thus, a transaction will only transpire if the minority, or more precisely, a majority of the minority, has consented to it. This arrangement assures the minority more than a minimum fair price, however. It empowers the minority to look after its own interests and to strive to obtain the maximum price it can achieve. Placing the decision in the minority's hands maintains a regime of voluntary transactions and preserves the role of subjective valuations.Approval by disinterested director as neutral decision-making body removes the interested director cloud and the transaction cannot be invalidated solely because an interested director is involved. The attitude of case law and statues about disinterested director quorum and voting requirement is not coherent. It is clear that the most influential test was the "Sufficient for Such Purpose" Test employed by California's 1931 statute. Its basic approach and structure remain in force in leading commercial and corporate jurisdiction. ALI uses a reasonable conclusion test rather than the business judgment rule as the standard of review for disinterested director approval of self-dealing transactions. While MBCA uses the business judgment rule as the standard of review for disinterested director approval of self-dealing transactions. The Consequences of Approval by a fully-informed disinterested shareholder vote absence of coercion is to limit a court's scrutiny of the fairness of the transaction. Approval or ratification by fully-informed, Disinterested shareholders is sufficient to invoke the business judgment rule substantially affects the burden of proof, extinguishes duty of care claim, dose not operates to extinguish fiduciary duty of loyalty claim.Entire fairness test is the major test used by court review directors'self-dealing, the factor judge considered include. First, information disclosure, Delaware law imposes upon a board of directors the fiduciary duty to disclose fully and fairly all material facts within its control that would have a significant effect upon a stockholder vote. Judge will review the disclosure of dealing about the language and details to insure accurate and reality. Second, fair price, The factors considered by judge about the fair price of dealing is assets, profit future and other factors effecting the inherent value of the corporation, the dealing obtained from independent appraisers appraisals could be sustained by courts, Third, fair dealing, the dealing is accorded with the best interest of corporation.the initial of dealing, negotiation, outside directors'approval acquired, controlling of interested director. We can improve our corporation law on information, quorum and voting requirement.