Del. Court Clarifies Definition Of ‘Controlling Stockholder'

By Michael Greene

Nov. 25 — Directors who own a substantial amount—but less than 50 percent—of the corporation's stock are not controllers, even when they stand on both sides of a conflicted transaction, unless they exercise actual control over the board, according to a Nov. 25 Delaware Chancery Court opinion.

Vice Chancellor Sam Glasscock III opined that “actual control of corporate conduct means actual control over the corporation's board of directors in the transaction at issue.”

Looking at its recent decisions, the court concluded that two interested directors were not controllers of the transaction at issue and that the plaintiffs failed to plead demand futility.

Conflicted Transaction?

Plaintiff stockholders filed a derivative lawsuit against Sanchez Energy Corp.'s board of directors alleging a breach of fiduciary duty arising from a transaction in which the corporation purchased assets from a shell entity controlled by two members of Sanchez energy's board. The transaction, however, was approved by an audit committee consisting of the company's three other board members.

The defendants filed a motion to dismiss for failure to make a pre-suit demand. The plaintiffs argued that demand should be excused because two of the three disinterested directors lacked independence and the transaction was not a product of a valid exercise of business judgment.

Not Controlling Stockholders

The plaintiffs argued that the transaction should be evaluated under the entire fairness standard because the two interested directors should be treated as controlling stockholders.

Vice Chancellor Glasscock noted that two recent Delaware Chancery Court opinions—In re KKR Financial Holdings, LLC Shareholders Litig. (29 CCW 324, 10/22/14) and In re Crimson Exploration Inc. Stockholders Litig. (29 CCW 340, 11/5/14)—reaffirmed the view that “minority Stockholders are controllers only where they exercise actual control over board.”

The court found that the plaintiffs' allegations did not support an inference that the interested directors were controlling stockholders.

The court also determined that there were no facts to support that the chief executive officer director exercised “any greater control than that typical of a CEO,” and there was no evidence that he dominated or controlled the board.

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