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Lewis v. S. L. & E., Inc. - 629 F.2d 764 (2d Cir. 1980)

Rule:

The business judgment rule presupposes that the directors have no conflict of interest. When a shareholder attacks a transaction in which the directors have an interest other than as directors of the corporation, the directors may not escape review of the merits of the transaction. A transaction is voidable unless shown by its proponent to be fair and reasonable to the corporation. N.Y. Bus. Corp. Law § 713Section 713 also provides special rules for scrutiny of a transaction between the corporation and an entity in which its directors are directors or officers or have a substantial financial interest.

Facts:

Plaintiff shareholder refused to sell his shares under a contract to defendants, closely held corporation and its officers and directors, because of an allegation of waste for the failure to charge a reasonable rent to another closely held corporation with the same officers and directors. At trial, plaintiff lost the derivative action for waste and attorneys' fees while defendants won its specific performance action to enforce the contract and for attorneys' fees.

Issue:

Did the company directors bear the burden of demonstrating that the transaction was fair and reasonable when they have caused the corporation to enter into a transaction in which they have a personal interest?

Answer:

Yes.

Conclusion:

The court reversed and remanded because under N.Y. Bus. Corp. Law § 713, defendants, as the officers, directors and/or shareholders of the lessee corporation while serving as the directors of defendant closely held corporation, had the burden to prove that there was no waste, which they failed to do. Defendants were not entitled to attorney's fees where there was no statutory allowance, while plaintiff was entitled to attorneys' fees under N.Y. Bus. Corp. Law § 626(e).

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