Whether a large stockholder is a controlling stockholder is an important consideration when evaluating the viability or desirability of pursuing ‘interested’ transactions with controllers. Transactions with controllers are not prohibited, but generally they are subject to Delaware’s highest standard of judicial review: entire fairness, which requires proof of fair dealing throughout the transaction and fair price. However, “where the (transaction) is conditioned ab initio upon both the approval of an independent, adequately-empowered special committee that fulfils its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders”, Delaware courts may apply deferential business judgment review when considering challenges from minority stockholders. Kahn vs. M&F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014). This article discusses recent developments in Delaware law explaining when a stockholder becomes a controller and how companies considering transactions with controlling stockholders can increase their chances of surviving judicial scrutiny.

When a stockholder becomes a ‘controlling stockholder’

Under Delaware law, a stockholder becomes a controlling stockholder by owning a majority of the company’s shares or maintaining ‘actual control’ over the business affairs of the company. Whether a stockholder maintains actual control over the company may require a complex analysis. In 2014, several Delaware decisions examined when a minority stockholder becomes a controller. Hamilton Partners, L.P. vs. Highland Capital Management, L.P., 2014 WL 1813340 (Del. Ch.)); In re KKR Financial Holdings LLC Shareholder Litigation, 101 A.3d 980 (Del. Ch. 2014)); In re Crimson Exploration Inc. Stockholder Litigation, 2014 WL 5449419 (Del. Ch.); In re Sanchez Energy Derivative Litigation, 2014 WL 6673895 (Del. Ch.); In re Zhongpin Inc. Stockholders Litigation, 2014 WL 6778537 (Del. Ch.). These rulings show that one’s status as a controller depends on the acts he takes or influence he exerts to prevent the board from acting independently.

Apr-Jun 2015 issue

Bayard, P.A.