Can post-remand corporate action moot the need for a fairness hearing? McLaughlin v. Schenk Explained

In McLaughlin v. Schenk, the Utah Supreme Court addressed whether post-remand corporate ratification could resolve conflicts of interest and eliminate the need for court-ordered fairness hearings. This case provides important guidance for practitioners handling corporate governance disputes involving conflicted transactions.

Background and Facts

Greg Schenk purchased shares in Cookietree, Inc. in 1999, violating the company’s 1991 Shareholder Agreement. In 2005, both the board of directors and shareholders, including Schenk acting in both capacities, voted to waive the agreement’s restrictions. Minority shareholder Samuel McLaughlin challenged this action. The Utah Supreme Court initially found the 2005 waivers were tainted by Schenk’s conflict of interest and remanded for a fairness determination in McLaughlin I.

Following remand, Cookietree attempted to cure the conflict through new corporate action. In 2009, the company’s sole disinterested director, David Rudd, voted to ratify the 2005 waivers after the two conflicted directors abstained. The replacement district court judge found this ratification resolved the conflict and granted summary judgment, while McLaughlin argued a fairness hearing was still required.

Key Legal Issues

The court examined whether the district court violated the law of the case doctrine by reconsidering a prior ruling, whether post-remand corporate action could satisfy the appellate mandate, and whether the 2009 ratification under Utah Code sections 850-853 was legally sufficient to resolve the conflict of interest.

Court’s Analysis and Holding

The Supreme Court affirmed the summary judgment. The court held that the replacement judge properly exercised discretion under the law of the case doctrine, as trial courts remain free to reconsider prior rulings before final judgment. Importantly, the court found that nothing in the remand order precluded the corporation from taking corrective action through proper corporate procedures.

Under sections 850-853 of the Utah Revised Business Corporation Act, Rudd’s vote as the sole qualified director constituted valid corporate action. The court rejected McLaughlin’s argument that Rudd lacked sufficient information, finding no statutory requirement for “perfect knowledge” by disinterested directors.

Practice Implications

This decision demonstrates that corporations facing remand orders in conflict of interest cases should consider whether post-remand ratification by disinterested parties can cure prior defects. Practitioners should carefully analyze whether corporate governance statutes provide alternative paths to resolution rather than assuming court-supervised proceedings are mandatory. The decision also reinforces that trial courts retain significant discretion to reconsider prior rulings during ongoing litigation.