Recent Delaware Court of Chancery Decisions Address When A Non-Majority Stockholder Will Be Deemed a Controlling Stockholder

In three recent decisions,the Delaware Court of Chancery reiterated that under Delaware law, a large, though not majority, stockholder of a corporation will not be considered a controlling stockholder (with the attendant fiduciary duties) unless that stockholder actually controlled the board of directors’ decisions with regard to the transaction in question. In the first of these decisions, In re KKR Financial Holdings LLC Shareholder Litigation, Chancellor Bouchard rejected the plaintiff-stockholders’ novel claim that a 1 percent stockholder was a controlling stockholder because its affiliate managed the day-to-day business operations of the corporation pursuant to a management agreement. In the second decision, In re Crimson Exploration Inc. Stockholder Litig., Vice Chancellor Parsons rejected a claim that a 34 percent stockholder, which also was a large creditor of the corporation, was a controlling stockholder because the plaintiffstockholders failed to allege facts sufficient to support a reasonable inference that the large stockholder actually exercised control over the corporation or the negotiation of the challenged merger. In the third decision, In re Sanchez Energy Derivative Litigation, Vice Chancellor Glasscock held that a father and son, who together owned 21.5 percent of the corporation’s stock and who both served on its board of directors, were not adequately alleged to be controlling stockholders of the corporation because there were no well-pled allegations indicating that the pair actually controlled the company’s board of directors in connection with the transaction challenged in the litigation.

In a fourth case, In re Zhongpin Inc. Stockholders Litig., Vice Chancellor Noble, relying on perhaps the most ‘‘aggressive’’ Court of Chancery decision that a non-majority stockholder was a controller, found that it was reasonably conceivable that a 17 percent stockholder, who also was the corporation’s founder, chairman and CEO, could be a controlling stockholder.

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