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Chancery Clarifies Controlling Stockholder Fiduciary Duties in Sears Litigation

In re Sears Hometown and Outlet Stores, Inc. S’holder Litig., C.A. No. 2019-0798-JTL (Del. Ch. Jan. 24, 2024)
Here, a special committee of the board supported a plan to liquidate the company’s floundering business segment and continue operating its more promising business segment. The company’s controlling stockholder opposed the plan and took action to prevent its implementation. He first adopted a bylaw that created hurdles to the plan’s approval. He then replaced two of the three directors serving on the special committee who most favored the plan. He ultimately agreed to acquire the minority stockholders’ interests in a squeeze-out transaction negotiated with the remaining special committee member. 

In the resulting fiduciary duty litigation against the controller, the Court of Chancery most notably clarified the fiduciary duties of controlling stockholders when exercising stockholder-level voting power. The Court reasoned that a controller’s intervention is not inequitable per se but should implicate fiduciary duties, albeit duties different than those of a director. Regarding the appropriate standard of conduct, the Court held that, when exercising stockholder-level voting power, a controller owes a duty of good faith to not harm the corporation or its minority stockholders intentionally, as well as a duty of care to not harm them through grossly negligent action. Regarding the appropriate standard of review, the Court held that enhanced scrutiny was most fitting in a scenario like this one, where a controller acts to impair the rights of the board or a stockholder minority. 

Applying these standards to the case at bar, the controller needed to show that he acted in good faith for a legitimate objective, that he had a reasonable basis for believing that action was necessary, and that he selected a reasonable means for achieving his legitimate objective. The Court found the controller met his burden in this regard and did not breach his fiduciary duties in intervening and blocking the special committee's plan. The controller had a good-faith belief that the plan was flawed and had acted reasonably in his efforts to avoid the potentially flawed decision. However, the controller's ultimate acquisition of the minority stock following his intervention was a conflicted transaction and separately needed to satisfy the entire fairness review. On that point, the controller failed to carry his burden to prove the acquisition was entirely fair as a matter of price and process, and the Court found him liable for approximately $18 million in damages. 

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