In 2024, Delaware courts expanded their review of actions of controlling stockholders. Significant stockholders, even if holding less than a majority of a company’s shares, when dealing with the company, must consider whether they nonetheless might be deemed to control particular actions of the company, if not the company itself, and controlling stockholders and companies must recognize, consider, and manage conflicts in transactions and other operations. The courts’ increasing scrutiny of such actions has inspired debate, including some calls for movement out of Delaware, though (with a few notable exceptions, such as Tesla) few companies have reincorporated. Entire Fairness and MFW Applied to All Conflicted Controller Transactions The Delaware Supreme Court, in Match Group,31 held that entire fairness (Delaware’s most stringent standard of review) presumptively applies to any transaction where a controlling stockholder stands on both sides and receives a nonratable benefit. Accordingly, to get the benefit of the deferential business judgement rule under MFW,32 a controlling stockholder must commit at the appropriate time to obtain, and then actually obtain, approvals 31 In re Match Group, Inc. Derivative Litigation (Del. Supreme, Apr. 4, 2024). 32 Kahn v. M & F Worldwide Corp. (Del. Supreme Mar. 14, 2014) (known as “MFW”). 33 In re Sears Hometown and Outlet Stores, Inc. Stockholder Litigation (Del. Ch. Jan. 24, 2024). of both (1) a committee of independent directors and (2) a majority of independent stockholders. Obtaining only one of these approvals might shift the burden in litigation to the plaintiff, but the standard of review would remain entire fairness. Match itself involved the separation of businesses by the company’s controlling stockholder, rather than a squeeze out acquisition as had been at issue in the original MFW decision. The Court also held that, for purposes of MFW cleansing, all members of the board’s committee must be disinterested, and not just a majority. In addition, the Court reviewed some of the factors that might impinge on a director’s independence from a controller, such as deep friendships or other business relationships. Enhanced Scrutiny of Controllers Using Stockholder Level Powers In Sears Hometown,33 a special committee of the board decided to liquidate one of the company’s two business segments, and the company’s controlling stockholder (who was not represented on the special committee) responded by using its stockholder powers to remove two of the three members of the special committee and to amend the company’s bylaws to make approval of the liquidation procedurally more difficult. The Delaware Chancery Court noted that a controlling stockholder, when using its voting power as a stockholder to change the status quo, is engaging in a fiduciary act, and so may owe some form of fiduciary duties to the corporation and its minority stockholders; conversely, when using its stockholder power to vote against a change, thereby maintaining the status quo, the controlling stockholder is not engaging in a fiduciary act. Much like a controlling stockholder’s duties in a sale of its shares are limited to non-harm (e.g., do not sell to a “looter”), a controlling stockholder voting its stock to change the status quo merely owes the duties of loyalty (not to intentionally harm the corporation or minority stockholders) and of care (not to harm the corporation or minority stockholders through gross negligence), but does not need to meet the higher standard required of directors to affirmatively act in a way they subjectively believe is in the best interests of the corporation. The Delaware Chancery Court applied enhanced scrutiny to the controlling stockholder’s actions, and found that the controlling stockholder satisfied that standard for these steps, since he held a good faith belief 7. Dealing with Controlling Stockholders 16 Morrison Foerster
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