Law School Case Brief
Marciano v. Nakash - 535 A.2d 400 (Del. 1987)
A non-disclosing director seeking to remove the cloud of interestedness would appear to have the same burden under Del. Code Ann. tit. 8, § 144(a)(3), as under prior case law, of proving the intrinsic fairness of a questioned transaction that had been approved or ratified by the directors or shareholders. On the other hand, approval by fully-informed disinterested directors under § 144(a)(1), or disinterested stockholders under § 144(a)(2), permits invocation of the business judgment rule and limits judicial review to issues of gift or waste with the burden of proof upon the party attacking the transaction.
A joint venture called Gasoline launched in 1984 between the Marcianos and the Nakashes to market designer jeans and sportswear. It was agreed that the Nakashes would receive 50 percent of the stock of Guess for a consideration of $4.7 million. As a result, the three Nakash brothers joined three of the Marcianos on the board of directors. Unfortunately, differences between the two families quickly surfaced with resulting deadlocks at the director level of both Guess and Gasoline. At one time, the Nakash family advanced approximately $2.3 million of their personal funds to Gasoline to enable the corporation to pay outstanding bills and acquire inventory. At that time, the questioned transactions did not receive majority approval of Gasoline's directors or shareholders despite its was an interested transaction. When Gasoline was going to be liquidated, the Nakash family asserted their claims at the liquidation proceeding. The Marciano family argued that the debt was void under Del. Code Ann. tit. 8, § 144 because it originated in self-dealing transactions. The Court of Chancery (Delaware) held that interested director loans were valid and enforceable debts of the corporation and were not void as self-dealing transactions. On appeal, Marcianos argued that the chancery court applied the wrong standard of review for self-dealing transactions and thus, its finding of full fairness was erroneous.
Were the loans by the principles the result of self-dealing by interested parties and thus, void under the Bankruptcy Code?
The court held that relationship alone was not the only factor to determine if an interested director transaction was void. Since the loans were made on favorable terms, the loans were not automatically void under the intrinsic fairness test, in light of the financial circumstances of the corporation.
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