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Keywords

defendantappealtrialsummary judgmentburden of proofcorporation

defendantappealsummary judgment

Related Cases

Michelson v. Duncan, 407 A.2d 211

Facts

In 1966, the Board of Directors of Household Finance Corporation (HFC) authorized a stock option plan for key employees, including directors. Between 1971 and 1974, the Board modified the plan, increasing the exercise limits and issuing new options at lower prices after a decline in stock value. The stockholder, Michelson, alleged that these modifications were unauthorized and that the options were granted without consideration, constituting a gift or waste of corporate assets. The defendants moved for summary judgment, which the Vice-Chancellor granted, leading to this appeal.

In 1966, the Board of Directors of HFC authorized a stock option plan whereby certain key employees, including a number of the directors, were granted options to purchase stock in HFC following a two year waiting period after grant.

Issue

Did the stockholder's complaint sufficiently allege claims of gift or waste of corporate assets, and was the 1977 shareholder ratification of the directors' actions sufficient to grant summary judgment in favor of the defendants?

The principal issue on appeal is whether a 1977 non-unanimous shareholder ratification of the earlier modifications of the Plan and of the options granted under the modified Plan entitled defendants to a grant of summary judgment.

Rule

A validly accomplished shareholder ratification can cure otherwise unauthorized acts of officers and directors, provided the ratification is fairly accomplished and the acts are voidable rather than void.

A validly accomplished shareholder ratification relates back to cure otherwise unauthorized acts of officers and directors.

Analysis

The court found that the complaint adequately alleged claims of gift or waste, as it asserted that the options were granted without consideration. The court also determined that the 1977 ratification by shareholders was effective in curing the lack of authority claims but did not dispose of the claims regarding the absence of consideration. The court emphasized that the burden of proof regarding the adequacy of consideration shifted to the stockholder after ratification.

The court found that the complaint adequately alleged claims of gift or waste, as it asserted that the options were granted without consideration.

Conclusion

The court affirmed the Vice-Chancellor's grant of summary judgment for the defendants regarding the lack of authority claims but reversed the decision concerning the claims of gift or waste, allowing those claims to proceed to trial.

The court affirmed in part and reversed in part the holdings of the Vice Chancellor.

Who won?

Defendants prevailed in part, as the court upheld the ratification of their actions, which cured the lack of authority claims.

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