Michelson v. Duncan

In 1966, the board of directors (board) of Household Finance Corporation (Household) (defendants) and Household’s shareholders approved a stock-option plan. Key company employees were eligible to participate in the plan. The plan provided for options to be priced at 90 percent of the market price for Household’s stock when the options were granted and permitted recipients to exercise 10 percent of their options annually after a two-year postgrant waiting period. Faced with a dramatic decline in Household’s stock price that made existing options unattractive to exercise, the board amended the option plan in 1974 (1974 plan). Under the 1974 plan, Household cancelled existing options and exchanged them for new options at Household’s stock current market price (which was substantially less than the original option prices). A. Elihu Michelson (plaintiff), a Household shareholder, brought a derivative suit against Louis Duncan (defendant) and other members of the board and Household, arguing that options granted after December 31, 1973, were void because the board was not authorized to award the options without shareholder approval and that Household did not receive adequate consideration for them. The board and Household moved for summary judgment on various grounds. Michelson cross-moved for summary judgment based on the board’s asserted lack of authority. While the summary-judgment motions were being briefed, the board asked the shareholders to ratify the 1974 plan, which the shareholders did by majority vote. Shortly thereafter, the board and Household urged the court that the ratification defeated Michelson’s claim that the board lacked authority because the challenged transactions were at worst voidable, not void. Michelson responded that (1) any ratification did not affect his claim for consequential damages, (2) the claimed ratification was ineffective because the shareholders were not fully informed due to the alleged inadequacy of the annual meeting’s proxy materials, and (3) the gift or waste of corporate assets could not be ratified. Michelson complained that the proxy materials did not explicitly identify certain of his arguments. The vice-chancellor granted summary judgment to the board and Household, ruling that the challenged acts were voidable and that shareholders ratified the challenged actions notwithstanding Michelson’s complaints about the proxy materials because the materials (which included the complete text of Michelson’s complaint) completely and candidly disclosed all relevant information. Michelson appealed.