Explicit and Implicit Bundling in Shareholder Voting on Cleansing Acts

Delaware courts have expanded the cleansing effect of a shareholder vote, thereby endowing shareholder votes with greater normative weight than at any time in the modern period. Outside the context of a conflicted transaction involving a controlling shareholder, a fully informed uncoerced disinterested shareholder vote on a transaction is treated as a full defense against any claim for breach of fiduciary duty.  This implicitly bundles the consummation of the transaction with the cleansing of fiduciary duty breaches. We argue that this weight is misplaced from an internal corporate law perspective and represents a departure from the traditional treatment of shareholder ratification. A vote by a majority of target shareholders in favor of a transaction can be seen at most as evidence that shareholders believe that the value of their shares will be higher if the transaction takes place than if it does not take place as of the time of the vote—but such a vote does not indicate fairness and should not substitute for a fairness analysis.  As a more rational regime, we suggest holding separate votes on the transaction and cleansing.  Importantly, though separate, a board may decide to couple these votes by making consummation of the transaction contingent on an affirmative vote to cleanse. This explicit private ordering bundling has two advantages over the present implicit bundling by judicial fiat: boards can limit the scope of breaches submitted for a cleansing vote; and the board’s decision to condition a transaction on a cleansing vote could itself be analyzed for whether it amounts to coercion. Given the conceptual problems with imputing a cleansing effect to a vote on the transaction, what then explains the judicial confidence in the normative significance of shareholder votes? We suggest that judges adopted a legal fiction in response to what was perceived to be excessive deal litigation.  If that is the case, the question becomes whether it is a useful legal fiction or whether relying on other measures to reduce deal litigation would have been preferable.