In re Wheelabrator Technologies, Inc. Shareholders Litigation

The case is a shareholder class action, challenging a merger between Wheelabrator Technologies, Inc. (WTI) into a wholly-owned subsidiary of Waste Management, Inc. (Waste). In 1988, Waste acquired a 22% equity interest in WTI in exchange for certain assets that Waste sold to WTI. In 1990, Waste sought to become a majority shareholder in WTI, by acquiring an additional 33% stake in the company. The board held a special meeting and voted unanimously to approve and recommend the merger. The merger was then approved at a special shareholders meeting by a majority of WTI shareholders other than Waste. The plaintiffs allege that WTI and director defendants breached their fiduciary obligation to disclose material class information regarding the merger. The plaintiffs also claim that in negotiating and approving the merger, the director defendants breached their fiduciary duties of loyalty and care.

Ratification decisions that involve duty of loyalty claims are of two kinds: (a) "interested" transaction cases between a corporation and its directors (or between the corporation and an entity in which the corporation's directors are also directors or have a financial interest), and (b)cases involving a transaction between the corporation and its controlling shareholder. Regarding the first category, an 'interested' transaction of this kind will not be voidable if it approved in good faith by a majority of disinterested stockholders. Approval by fully informed, disinterested shareholders invokes "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." In the second category, cases involving a transaction between the corporation and its controlling shareholder, if the parent-subsidiary merger is conditioned on receiving from a majority of the minority, and approval is given, then the standard of review remains entire fairness, but the burden of demonstrating that the merger was unfair shifts to the plaintiff. The court held that because Waste was not a majority stockholder, the entire fairness standard of review didn't apply and the correct standard was the business judgment rule.

Fiduciary Duties & Shareholder Litigation | Duty of Loyalty | Majorities' Duties to Minorities | Parent-Subsidiary Dealings