Ordinarily a board decision is reviewed under the deferential business judgment standard. Where a controlling stakeholder or an interested director stands on both sides of the transaction, the more searching entire fairness standard can apply, and the defendants bear the burden.
Two components, examined together. Fair dealing — how the transaction was initiated, structured, negotiated, disclosed, and approved. Fair price — the economic and financial considerations, including assets, earnings, market value and future prospects.
Process is not a defence to price and price is not a defence to process, but in practice a demonstrably arm’s-length process does much of the work.
Burden shifting. Approval by a properly constituted, independent and empowered special committee, or by an informed vote of the disinterested minority, can shift the burden to the challenger. Satisfying both, with the conditions imposed from the outset, can restore business judgment review in some jurisdictions.
Independence is factual. Committee members with social, financial or employment ties to the controller are attacked on exactly that basis, and the minutes will be read for whether the committee had real bargaining authority, its own advisers, and the ability to say no.
In closely held companies the analysis is the same in substance even where the vocabulary differs: disclose fully, use disinterested approval, and record the alternatives considered.