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Showing 20 posts in Controlling Stockholder.

Court of Chancery Declines To Restrain Controller In Proposed Viacom-CBS Deal

CBS Corp., et al. v. National Amusements, Inc., et al., C.A. No. 2018-0342-AGB (Del. Ch. May 17, 2018) (Letter Op.)

Arising out of the highly-publicized dispute over the proposed transaction involving CBS and Viacom, each controlled by the Redstones, this decision is both front-page newsworthy and legally significant.  CBS and Viacom used to be one entity but split.  The Redstones retained voting control in each through a dual-class voting structure.  Later, the Redstones began pushing to merge the entities once again and both entities formed special committees to consider the proposal.  More ›


Court Of Chancery Explains Unfair Dealing Law In Cash-Out Case

Posted In M&A

In re Dole Food Co. Inc. Stockholder Litigation, C.A. 8703-VCL (August 27, 2015)

Aside from the very large damage award, this decision should be noted for its thorough analysis of the duties of a controlling stockholder and his aides in the way they act to carry out a going private transaction. More ›


Court Of Chancery Again Explains How To Do Sale Of A Company

Frank v. Elgamal, C.A. 6120-VCN (March 10, 2014)

Whether a stockholder or many stockholders acting as a group are in control of the process to sell a company has profound effects on the judicial review of what is done.  As this decision points out, "control" may be exercised over just part of the process as well.  Hence, this decision is a good explanation of when there is such control.


Court Of Chancery Examines Technical Requirements Of Stockholder Consents

The Ravenswood Investment Company L.P. v. Winmill, C.A. 3730-VCN (November 27, 2013)

Section 228 of the DGCL sets out the requirements to act by stockholder consent.  Here, the Court notes that each stockholder's signature should be separately dated.  While somewhat forgiving of a failure to observe all the technical requirements when there is no real factual dispute over what the stockholders did, this is a warning that a consent may be invalid if not done right.


Lewis Lazarus Authors Article on Plaintiffs' Pleading Burden in the Court of Chancery

Lewis H. Lazarus
This article was originally published in the Delaware Business Court Insider | June 15, 2011

A plaintiff who pleads successfully that a transaction under attack is governed by the entire fairness standard of review instead of business judgment generally stands a good chance of defeating the defendant's motion to dismiss.  That is because when a transaction is reviewed for entire fairness, defendants bear the burden in the first instance of proving at trial the fairness of the process and price.

In two recent cases - Ravenswood Investment Co. v. Winmill and Monroe County Employees' Retirement System v. Carlson - the Court of Chancery clarifies that a plaintiff must still make well-pleaded allegations that a transaction is unfair as to process and price if its complaint is to survive dismissal at the pleadings stage.

Ravenswood involved claims that defendant directors' adoption of a performance equity plan violated fiduciary duties by seeking to dilute the minority stockholders' percentage interest in non-voting Class A shares (only Class B shares had voting rights).  The court noted that the entire fairness standard applied because "where the individuals comprising the board and the company's management are the same, the board bears the burden of proving that the salary and bonuses they pay themselves as officers are entirely fair to the company unless the board employs an independent compensation committee or submits the compensation plan to shareholders for approval."

Because the directors employed no such protective measures, the court held that the entire fairness standard of review applied.  Still, citing Monroe County, the court held that the plaintiff "bears the burden of alleging facts that suggest the absence of fairness."

The court dismissed the plaintiff's complaint because it found he had failed to make well-pleaded allegations that the defendant directors' adoption of the performance equity plan was unfair.  Critical to the court's reasoning was that dilution occurs upon the adoption of any options plan; the question is whether the manner in which the options were issued unfairly diluted the stockholders.

As the defendants in their motion to dismiss did not challenge the plaintiff's claim for unfair issuance of the options, the court found that the plaintiff's allegation of dilution did not suffice to state a claim for unfairness in the adoption of the performance equity plan.

This was so because the plaintiff alleged that "(1) the Performance Equity Plan only authorizes the Board to grant stock options with an exercise price not lower than the market value as of that event, (2) the Defendants already control all of the Company's voting rights through their ownership of its Class B shares, and (3) even if all options authorized under the plan were to be granted to the Defendants they would not obtain a majority interest in the Class A shares... ."

The court noted that although it was true that the Class A shares could vote to approve a merger, the plaintiff made no allegation in his complaint that the adoption of the performance equity plan impaired those voting rights.  The court declined to comment on whether such an allegation may have sufficed to sustain this claim.

The Ravenswood court relied upon the court's holding in Monroe County.  That case involved a challenge to an intercompany agreement that required the plaintiff's company to purchase services and equipment from its controlling shareholder on terms in conformity with (for services) or the same as (for equipment) what the controlling shareholder charged its other affiliates.  The parties agreed that the arrangement the plaintiff attacked was governed by the entire fairness standard of review.

They disagreed as to whether the plaintiff's pleading sufficed to survive a motion to dismiss.

As summarized by the court: "Delaware law is clear that even where a transaction between the controlling shareholder and the company is involved such that entire fairness review is in play, plaintiff must make factual allegations about the transaction in the complaint that demonstrate the absence of fairness. (citations omitted).  Simply put, a plaintiff who fails to do this has not stated a claim.  Transactions between a controlling shareholder and the company are not per se invalid under Delaware law. (citation omitted).  Such transactions are perfectly acceptable if they are entirely fair, and so plaintiff must allege facts that demonstrate a lack of fairness."

In reviewing the complaint, the court found no allegations that the price at which the controlling stockholder provided the services and equipment was unfair.  Instead, the court found that plaintiff's allegations addressed only alleged unfair dealing.

In the absence of an allegation that the company could have obtained the services or equipment on better terms from a third party or any specific allegation of the worth of the services or equipment relative to what the company paid, the court found that the complaint did not make sufficient factual allegations that the intercompany agreement transactions were unfair.  Because the plaintiff chose to stand on its complaint in response to the defendants' motions to dismiss rather than to amend, the court dismissed plaintiff's complaint with prejudice under Court of Chancery Rule 15(aaa).

Together, these two cases clarify that a plaintiff cannot survive a motion to dismiss simply by alleging that a transaction involving a controlling stockholder is unfair.  A plaintiff instead must make particular factual allegations suggesting why the transaction was unfair.  A plaintiff who cannot make such allegations and who stands on a conclusory complaint, as in Ravenswood, may find that its claims are dismissed with prejudice.

Lewis H. Lazarus ( is a partner at Morris James in Wilmington and a member of its corporate and fiduciary litigation group.  His practice is primarily in the Delaware Court of Chancery in disputes, often expedited, involving managers and stakeholders of Delaware business organizations.  The views expressed herein are his alone and do not necessarily reflect the firm or any of the firm's clients.


District Court Applies Delaware Statute of Limitations Carve Out For Fiduciary Claims, Denies Summary Judgment

Norman v. Elkin, 2007 WL 2822798 (D.Del. Sept. 26, 2007)

In this action the District Court evaluated the application of the statute of limitations to claims that a corporate fiduciary engaged in self-dealing at the corporation’s expense. Plaintiff was a 25% shareholder in a closely-held Delaware corporation with Pennsylvania headquarters, formed to participate in the wireless communications industry. Defendant #1 owned the remaining shares of the corporation, and also served as its President and sole director. Plaintiff alleged that Defendant #1 breached his duties to the corporation when he personally obtained newly-issued communications licenses from the FCC, then sold them along with the corporation’s pre-existing licenses to a third party, keeping the proceeds of the sale himself. Plaintiff further alleged that Defendant #1 took the action without notifying Plaintiff in his capacity as a shareholder, without holding an annual meeting, and without making any disclosure of the sale. Plaintiff sued Defendant #1, along with his wholly owned corporation and another corporate officer, in the Delaware Court of Chancery for breach of contract, unjust enrichment, declaratory relief, and breach of various fiduciary duties. Defendants removed the action to District Court based on diverse citizenship and moved for summary judgment, arguing that all claims were time-barred. More ›


Court of Chancery Holds Dividends May Not Be Forced

Superior Vision Services, Inc. v. Reliastar Life Insurance Company, C.A. No. 1668-N (Del. Ch. August 25, 2006). This decision answers the question of when a minority shareholder may block a dividend payment pursuant to the authority to do so in the company's certificate of incorporation. The Superior Vision charter provided that a dividend could not be paid absent the consent of 2/3 of the shareholders. As a 44% owner, the defendant refused to consent to the dividend. The company sued alleging that the defendant had violated a fiduciary duty to consent to the dividend and its duty of good faith and fair dealing. The Court first held that absent actual control over the board of directors, a minority shareholder would not be deemed to be in control of the board just because it can block a board decision to pay a dividend. As a result, the Court concluded that the defendant did not owe a fiduciary duty to the company or its shareholders. In addition, the Court held that when, as here, the certificate of incorporation confers a power to veto a transaction and does not condition the exercise of that right, then there is no duty to act reasonably in that regard. Hence, the duty of good faith and fair dealing was not implicated and the Court dismissed the complaint. More › Share

Supreme Court Clarifies Tooley

<a href="" Gentile v. Rossette, C.A. No. 573, 2005 (Del. Supr. August 17, 2006). This Delaware Supreme Court decision significantly clarifies the Court's Tooley decision that governs when a claim is a derivative claim. Because a derivative claim must meet significant pleading requirements under Court of Chancery Rule 23.1, this decision affects much of the corporate litigation in the Delaware Court of Chancery and merits careful reading. More › Share

Court of Chancery Awards Both Appraisal And Equitable Relief

In re PNB Holding Co. Shareholders Litigation, C.A. No. 28-N (Del. Ch. August 18, 2006). As it has several times in recent years, the Court of Chancery has decided a case combining appraisal rights and a class claim for inequitable treatment in a merger. The Court held that when directors get together to freeze out the other stockholders the entire fairness test applies even when they do not own a majority of the stock. This follows because the interests of those directors in remaining shareholders differs from the other shareholders who will be frozen out. Absent some insulating procedure such a majority of the minority vote, the directors then have the burden of proving the merger was entirely fair. More › Share

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. More › Share

Court of Chancery Holds Veto Power May Constitute Control

Williamson v. Cox Communications, Inc., C.A. No. 1663-N, 2006 WL 1686375 (Del. Ch. June 5, 2006). For the first time, the Court of Chancery has ruled that the power to veto a transaction may constitute the power to control a Delaware corporation. This is significant because a controlling stockholder has fiduciary duties to the other stockholders. While the facts of this case are probably unique and its implication for the litigants are unclear at this early stage, the complaint has withstood a motion to dismiss. Share

Court of Chancery Finds Merger Between Controlling Stockholder and Subsidiary Unfair

Gesoff v. IIC Indus. Inc., C.A. No. 19473, 2006 WL 1458218 (Del. Ch. May 18, 2006). Plaintiff filed a class action, claiming a merger was the subject of unfair dealing and produced an unfair price. Another plaintiff filed a statutory appraisal claim based on the same merger. More › Share

Court of Chancery Finds Remedy for Breach of Fiduciary Duty Identical to Appraisal Award

Delaware Open MRI Radiology Associates, P.A. v. Kessler, C.A. No. 275-N, 2006 WL 1215096 (Apr. 26, 2006). This case was described by Vice Chancellor Strine as "another progeny of one of our law's hybrid varietals: the combined appraisal and entire fairness action." The court was tasked with determining whether the share price in a squeeze-out merger was fair, and, if not, what the extent of the underpayment to the minority shareholders was. The court found that the merger price was unfair, and finding no difference between the award the petitioners/plaintiffs would receive in appraisal or in equity, the court awarded an amount equivalent to petitioners' pro rata share of the company's appraisal value on the date of the merger. More ›


Court of Chancery Awards $4.8 Million, Plus Interest, to Minority Shareholders for Damages Suffered from Director Defendants' Breach of the Fiduciary Duty of Loyalty

Oliver v. Boston University, C.A. No. 16570-NC, 2006 WL 1064169 (Del. Ch. Apr. 14, 2006). Defendant Boston University ("BU") was the controlling shareholder of Seragen, a financially troubled biotechnology company. Plaintiffs, a group of former minority stockholders of Seragen's common stock, challenged certain transactions before Seragen was merged and the process by which the merger proceeds were divvied up. The plaintiffs contended that the BU defendants breached their fiduciary duties to Seragen's common shareholders by approving various financial transactions, which were not fair to the common shareholder as a matter of price and process. The Court of Chancery awarded damages in excess of $4.8 million plus interest for breaches of the fiduciary duty of loyalty. More ›


Court of Chancery Grants Partial Summary Judgment with Respect to Claims that Former Controlling Stockholder Extracted Excess Compensation from Acquirer in Exchange for Supporting Merger

Crescent/Mach I Partnership, L.P. v. Turner, C.A. No. 17455-NC, 2005 WL 3618279 (Del. Ch. Dec. 23, 2005). Former stockholders who were cashed out in connection with merger sued the corporation's former controlling stockholder and the acquirer for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, respectively. Plaintiffs complained of numerous side deals, allegedly negotiated by the controlling stockholder. Plaintiffs also complained that the controlling stockholder breached his fiduciary duty by supplying growth projections that he knew to be unduly pessimistic and inconsistent with management's view. Defendants moved for summary judgment, which the court granted in part and denied in part. More › Share
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