Delaware Business Litigation Report

Court of Chancery Defines When a "Controlling Stockholder" Exists

Dubroff v. Wren Holdings LLC, C.A. 3940-VCN (May 22, 2009)

A claim that stockholders were wrongly diluted by the issuance of additional stock is generally consider a derivative claim that must meet tough pleading standards. However, when the dilution is caused by a controlling stockholder, the claim is also a direct claim that may be filed without meeting  the rules for derivative suits. This is a big advantage.

This decision holds that a group may be consider a "controlling stockholder" for purposes of determining when a direct claim may be filed. Note that acting in parallel or voting together on an issue is evidence of acting as a group but is not enough to meet the rule requiring the pleading of facts that show an agreement to act together as a group.

This decision is also important as the first time the Court has addressed what must be disclosed in the information statement that must be sent to stockholders after stockholder consent under Section 228 is executed.  Fair, if not full, disclosure is required, including whether corporate insiders benefited from the action taken by consent.

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