Corporations – Shareholders – Power of the Majority to Ratify Director’s Fraud

Plaintiff, a stockholder in the Kroger Company, brought a derivative suit against a subsidiary of the company and certain officers and directors of both the parent and the subsidiary. It was alleged that . Kroger’s directors had fraudulently waived the company’s preemptive right to a new issue of stock of the subsidiary and had then purchased the shares for their own accounts at a price far below the market value. The defendants answered that the sale had been ratified by a majority in interest of disinterested stockholders to whom all the details of the transaction had been explained, and denied plaintiff’s right to bring a derivative suit without first having made a demand on the stockholders to take remedial action. The trial court dismissed the complaint and the court of appeals affirmed, holding that although a majority could not ratify a director’s fraud over the objection of any of the stockholders, the plaintiff nevertheless lacked standing to sue without having made a prior demand on the stockholders. On appeal, held, affirmed as modified, one judge dissenting. A demand on the stockholders was a prerequisite to bringing the suit, because a majority in interest of the stockholders have the power to ratify the director’s fraud so long as the ratification is by disinterested stockholders and there is no fraud in obtaining their vote. Claman v. Robertson, 164 Ohio St. 61, 128 N.E. (2d) 429 (1955).