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Chancery Denies Motion for Reargument, Finding No Change to Delaware Legal Principles for Existence of “Control Group” of Stockholders

Silverberg v. Padda, C.A. No. 2017-0250-KSJM (Del. Ch. Oct. 18, 2019)

Delaware courts recognize that a group of stockholders can constitute a “control group” when those stockholders “are connected in some legally significant way—such as by contract, common ownership, agreement, or other arrangement…” and work together toward a shared goal.  Sheldon v. Pinto Tech. Ventures, L.P., 2019 WL 4892348, at *4 (Del. Oct. 4, 2019) (citing Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009)).  Under such circumstances, the control group stockholders may owe fiduciary duties to the corporation’s minority stockholders.  Where a minority stockholder adequately pleads (1) the existence of a control group;  and (2) a self-dealing breach of fiduciary duties by that control group, the minority stockholder’s claims may be both direct and derivative. Gentile v. Rossette, 906 A.2d 91, 99-100 (Del. 2006).  In Silverberg v. Padda, Plaintiffs argued that they had alleged a direct claim by pleading that a control group of stockholders had breached fiduciary duties by approving alleged dilutive preferred stock issuances.  After the Court dismissed this claim based on Plaintiffs’ failure adequately to allege a control group, as opposed to mere parallel action,  Plaintiffs asserted in a motion for reargument that the Delaware Supreme Court’s recent Sheldon opinion had established a new legal principle to assess the existence of a control group.  The Court disagreed, ruling that Sheldon had reaffirmed the Dubroff standard that the Court had applied in dismissing Plaintiffs’ claims.  See Morris James blog post of October 14, 2019 (discussing the Court’s earlier decision).  The Court re-affirmed its holding that Plaintiffs’ allegations did not suffice to allege a control group because the agreement between the allegedly controlling stockholders (1) did not relate to the challenged transaction; (2) included persons other than the purported control group members; and (3) did not bind the signatories with respect to their votes on the challenged transaction.  Because the Court determined that Sheldon did not affect the Court’s holding that such allegations do not suffice to establish a control group, the Court denied Plaintiffs’ motion for reargument.