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Court Of Chancery Explains When A Minority Stockholder Has Control

Posted In Fiduciary Duty

In re Tesla Motors Inc. Stockholder Litigation, C.A. No. 12711-VCS (Del. Ch. Mar. 28, 2018)

Under Delaware law, a controlling stockholder need not be a majority stockholder. Rather, a controlling stockholder might be a group of aligned stockholders who together hold a majority.  Or, as in this case, it might be a minority but substantial stockholder who practically has and exercises board-level control with respect to the challenged transaction.  The presence of a controller is an important factor in litigation, including because, as here, it might prevent defendants from achieving a prompt dismissal of a post-closing fiduciary duty action based on stockholder approval under the well-known Corwin decision.  In this case, the factors relevant to finding control by the roughly 22% minority stockholder (i.e., Elon Musk) at the motion to dismiss stage included: (1) the individual’s history of eliminating opposition; (2) the board’s lack of safeguards to prevent his control over the company’s consideration and negotiation of the self-interested transaction; (3) a board packed with members interested in the transaction or beholden to him; and (4) public disclosures portraying him as in control.