The Entire Fairness Standard in Utah: Conflicted Transactions by Officers, Directors, and Managers

Most business decisions get deference. Courts do not second-guess directors and managers who make honest, informed decisions that turn out badly. That deference has a precondition: the people deciding must not be deciding for themselves.

When the people running a company sell its assets to themselves, move its business into a new entity they own, pay themselves, or sign away their own duties, the deference disappears. The question becomes whether the transaction was fair, and the fiduciaries have to prove it. In Delaware this is called entire fairness. Utah reaches the same place by statute and common law.

1. What triggers fairness review

The trigger is a conflict. Under Utah’s corporate statute, a director has a conflicting interest when the director or a related person is a party to the transaction, or has a beneficial financial interest in or is closely linked to it, and the interest is financially significant enough to be expected to influence judgment (Utah Code § 16-10a-850). The definition also reaches transactions with other entities the director serves or controls.

The common situations are familiar: insiders buying company property, related-party leases and loans, compensation the recipients approve for themselves, and restructurings that move a company’s assets into a new entity owned or controlled by the people who approved the move. A controlling owner who negotiates with itself over company assets is the clearest case.

2. Utah’s corporate statute: three safe harbors, and fairness is one

A conflicting-interest transaction is not subject to sanction solely because of the conflict if one of three things is true (Utah Code § 16-10a-851(2)):

• • it was approved by qualified directors under § 16-10a-852;
• • it was approved by qualified shareholders under § 16-10a-853; or
• • it “is established to have been fair to the corporation.”

Each harbor has real requirements. A qualified director cannot have a conflicting interest in the transaction, and cannot have a familial, financial, or similar relationship with a director who does. Spouses cannot qualify each other. Shareholder approval requires disclosure to the shareholders who vote. If neither approval happened, the only remaining harbor is fairness, and the statute’s own words put the burden of establishing it on the party claiming the protection.

3. LLCs: fairness as a statutory defense

Utah’s LLC statute is more direct. A manager, or a member in a member-managed LLC, owes the company a duty to refrain from dealing with it as, or on behalf of, a person having an interest adverse to the company (Utah Code § 48-3a-409(2)(b), now § 16-20-409). The statute then supplies the answer: “It is a defense to a claim under Subsection (2)(b) and any comparable claim in equity or at common law that the transaction was fair to the limited liability company” (§ 48-3a-409(7)).

A defense is something the defendant pleads and proves. It is not an element the plaintiff must negate to state a claim.

4. Utah common law: the burden is on the fiduciary

The statutes codify a rule Utah has applied for nearly a century. Where a fiduciary relationship is shown, the burden is on the fiduciary to show good faith and fair dealing (Glen Allen Mining Co. v. Park Galena Mining Co.). Interested directors bear the burden of showing their good faith and fair dealing (C & Y Corp. v. General Biometrics, Inc.).

The Utah Supreme Court applied the principle in McLaughlin v. Schenk. Where waivers of fiduciary obligations were tainted by a conflict of interest, the party with the conflict had to show the transaction was fair, unless it was approved by a vote of disinterested directors or shareholders. The court emphasized that close corporations are ripe for abuse of minority shareholders, described the fairness question as fact-intensive, and remanded for trial.

The Utah Court of Appeals went further in Bingham Consolidated Co. v. Groesbeck. A controlling shareholder owes the minority a duty to deal fairly and openly, and that duty is particularly high when the majority shareholder negotiates with itself to dispose of corporate assets. The court cited the Delaware rule that where the majority stands on both sides of a transaction, it bears the burden of establishing the transaction’s entire fairness to the minority (Harman v. Masoneilan International, Inc.). In Bingham, the controller assigned the company’s mining lease to itself while keeping the minority uninformed, and the court affirmed a finding of breach.

5. What fairness means: fair dealing and fair price

Delaware’s formulation, which Utah courts consult, has two parts (Weinberger v. UOP, Inc.):

The inquiry is unified, not a checklist. A transaction with no independent process, no disclosure, no fairness opinion, and no market testing will have a hard time proving it was fair at any price. And a reorganization does not avoid review by being called a mere reshuffling: the Delaware Supreme Court has rejected that argument where a controller stood on both sides (In re Match Group, Inc. Derivative Litigation).

6. Fiduciary waivers and restructurings

A common move in a restructuring is to have the new entity’s governing documents waive or limit fiduciary duties. When the same people sign on both sides, that waiver is itself a conflicted transaction. Under McLaughlin, it gets no deference unless disinterested directors or shareholders approved it; otherwise the conflicted parties must prove it was fair. A minority owner who received no notice and had no vote is the person the rule protects.

7. Litigating the claim