## Facts

- A shareholder of Household Finance Corporation (HFC) brought a derivative action against HFC and certain directors and officers challenging amendments to, and grants under, an employee stock-option plan.
- In 1966, HFC’s board and shareholders approved a stock-option plan for key employees, including some directors, with option prices set at 90% of market price at grant and exercisable in annual installments after a waiting period.
- After HFC’s stock price declined, many outstanding options became economically unattractive.
- Between 1971 and 1974, HFC’s board adopted modifications under which the company cancelled existing options and issued new options priced at the then-current (lower) market price, effectively repricing the options.
- The plaintiff alleged (i) the board lacked authority to implement the modifications and issue options without further shareholder approval and (ii) the cancellations and reissuances constituted a gift or waste of corporate assets due to inadequate consideration.
- While summary judgment motions were pending, HFC sought shareholder ratification of the modifications and related option grants; in 1977, a majority of shareholders approved ratifying resolutions.
- The proxy materials for the 1977 vote included a description of the challenged transactions and the full text of the plaintiff’s complaint.
- The Court of Chancery granted summary judgment for defendants, holding the transactions were voidable (not void), were ratified by shareholders, and that ratification defeated the plaintiff’s claims; the plaintiff appealed.

## Issues

1. Whether the board’s option-plan modifications and repriced option grants without prior shareholder approval were void or merely voidable and thus capable of shareholder ratification.
2. Whether the 1977 majority shareholder vote effectively ratified the challenged actions and cured any alleged lack of director authority.
3. Whether shareholder ratification also disposed of a claim that the transactions were a gift or waste of corporate assets.
4. Whether the proxy disclosures were sufficiently full and candid to support informed shareholder ratification.
5. Whether the complaint adequately stated a waste claim and whether that claim was waived in the trial court.

## Decision

- The Delaware Supreme Court affirmed in part and reversed in part, remanding for trial.
- The Court held the challenged option transactions were voidable rather than void and therefore were subject to shareholder ratification.
- The Court held the 1977 shareholder ratification cured the authority-based challenge to the modified plan and option grants.
- The Court held the complaint stated a claim for gift or waste of corporate assets and that the claim was not waived.
- The Court held shareholder ratification did not eliminate the waste claim; a trial was required on the existence and adequacy of consideration, with the burden of proof on the plaintiff due to ratification.
- The Court upheld the trial court’s conclusion that the proxy disclosures were adequate to support informed ratification.

## Legal Principles

- Corporate acts within the corporation’s general power, even if procedurally defective or involving conflicts, are typically voidable rather than void and may be cured by informed shareholder ratification.
- Informed shareholder ratification can validate challenged board action based on alleged lack of prior shareholder authorization and can change the standard of review and allocation of proof.
- Shareholder ratification is not an absolute defense to a properly pleaded claim of corporate waste (gift of corporate assets); such a claim may proceed after ratification.
- After shareholder ratification, the burden shifts to the plaintiff to prove failure of consideration or consideration so inadequate as to constitute waste.
- Disclosure sufficient for ratification requires full and candid disclosure of material facts enabling an informed vote; it need not advocate a litigant’s legal theories.

## Conclusion

The court held that majority shareholder ratification, supported by adequate disclosure, cured alleged defects in the board’s authority to reprice and reissue stock options, but it did not bar a derivative claim that the transaction was corporate waste; instead, the case was remanded for trial on whether the option exchanges lacked adequate consideration, with the plaintiff bearing the burden of proof.


Michelson v. Duncan, 407 A.2d 211 (Del. 1979)