Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d 114 (Del. 2006), affirming 891 A.2d 150 (Del. Ch. 2005)
Benihana of Tokyo v. Benihana is a staple of corporate law courses because it cleanly illustrates how Delaware General Corporation Law §144 interacts with the common-law standards of review in director conflict transactions.
Does approval of a financing transaction involving an interested director violate fiduciary duties or trigger entire fairness review when a fully informed, disinterested board majority approves the transaction, and does DGCL §144 require the interested director to abstain from voting for the safe harbor to apply?
Under DGCL §144(a)(1), a transaction between a corporation and another entity in which a director is interested is not void or voidable solely by reason of the director's interest if the material facts of the director's relationship or interest are disclosed or known to the board, and the transaction is approved in good faith by a majority of disinterested directors. Section 144 does not itself prescribe the standard of review; rather, it removes automatic voidability and restores the common-law framework. When a disinterested and independent board majority, acting in good faith and on an informed basis, approves a transaction after full disclosure, the business judgment rule applies. Entire fairness review is reserved for circumstances where a controlling stockholder stands on both sides of the transaction or where a majority of the approving directors are not disinterested or independent.
The Delaware Supreme Court affirmed the Court of Chancery, holding that the financing was validly approved by a fully informed, disinterested board majority and therefore protected by the business judgment rule. Compliance with DGCL §144(a)(1) was satisfied; the statute does not require the interested director to abstain so long as a disinterested majority approves after full disclosure. Entire fairness review did not apply, and the charter-based challenges failed.
Benihana is widely taught for three takeaways. First, DGCL §144 is a cleansing provision, not a standard of review; it removes automatic voidability of conflicted transactions but leaves intact the common-law standards (business judgment or entire fairness). Second, when a fully informed, disinterested, and independent board majority approves a transaction involving a conflicted director, the business judgment rule generally governs—even if the interested director participated in the vote. Abstention is not a statutory prerequisite. Third, the case underscores best practices: disclose conflicts, ensure a disinterested majority, develop a robust record of deliberation with expert advice, and articulate a bona fide corporate purpose. For students, Benihana sharpens the distinctions among §144 cleansing, the business judgment rule, and entire fairness, and it shows how process quality can determine the applicable standard and the outcome.