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Court of Chancery Clarifies Right To Buy Control

Abraham v. Emerson Radio Corp. C.A. No. 1845-N, 2006 WL 1879205 (Del. Ch. July 5, 2006). This decision makes it clear that a controlling stockholder may sell control without fear of liability for the actions of the buyer after the transaction closes, with few exceptions. While it has long been the rule that a stockholder may deal with its shares as it sees fit, case law recognized that a controlling stockholder has a fiduciary duty to its company and the minority owners by virtue of the controller's ability to control what the company does. How that duty applied in the sale of control context is the question addressed in this case. The courts have long held that it is a breach of the controlling stockholder's fiduciary duty to sell control to a known looter who then damages the interest of the minority left behind to suffer the consequences from the sale of control. This holding has been extended to those instances where even if the seller did not know the buyer is an evil one, at least when the seller should have known. In this case, the plaintiff tried to extend the seller's liability even further by contending that if the seller did not investigate the buyer's motive and negligently failed to discover a looter lurked, the seller was liable to the minority stockholders. The Court of Chancery squarely rejected this attempt to extend the responsibility of the seller of control. Share
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