Delaware Court Of Chancery Concludes Founder And Largest Shareholder Was Not A Controller In Connection With Allegedly Conflicted Transaction
M&A and Corporate Governance Litigation
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  • Delaware Court Of Chancery Concludes Founder And Largest Shareholder Was Not A Controller In Connection With Allegedly Conflicted Transaction

    On May 12, 2023, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery ruled in favor of defendant, the founder and largest shareholder (the “Founder”) of a technology company (the “Company”), on derivative breach of fiduciary duty claims in connection with the Company’s acquisition of a financial software company (the “Target”), for which he was also a co-founder and the largest shareholder.  In re Oracle Corporation Derivative Litigation, No. 2017-0337-SG (Del. Ch. May 12, 2023).  Defendant owned approximately 28% of the Company and 40% of the Target.  Plaintiff shareholders alleged that the Founder, who was also a director and Chief Technology Officer of the Company, “used his outsized influence” to cause it to overpay because he owned a larger percentage of the Target than of the Company.  After a ten-day trial, the Court determined that the Founder “was not in control of [the Company] generally” and, although he “could have influenced the directors’ decision” in connection with the transaction, “he did not.”  Accordingly, the Court concluded that the Founder was not a “controller” and, therefore, the transaction was entitled to deferential review under the business judgment rule.

    Plaintiffs asserted that the transaction was subject to the “exacting standard” of “entire fairness” because the Founder should have been deemed a controller even though he was not a majority shareholder.  Plaintiffs argued that the Founder was “a large blockholder,” as well as “a director and officer, who, as founder, [was] so identified with the company and so respected by the other directors and officers that he [had] the ability to influence decisions of the board to an extent that fiduciary duties attach” as a controller.

    The Court determined that the Founder “withdrew from [the Company’s] consideration of the [Target’s] acquisition” and “[a]ppropriately . . . insulated himself from the board’s discussion of [the] acquisition, throughout the process.”  The Court also found that “the remaining directors empowered a special committee to conduct the negotiation of any acquisition” of the Target and that the committee was “well-functioning and independent.”  For instance, the Court noted, the special committee “negotiated in hard-nosed fashion” and achieved a reduced deal price contrary to the Founder’s interest.  The Court also highlighted that the evidence demonstrated that the board “vigorously debated assumptions” and was “not afraid” to oppose the Founder.

    The Court acknowledged that the Founder was “a force,” as well as the “main creative party and a face” of the Company.  But the Court explained:  “The concept that an individual—without voting control of an entity, who does not generally control the entity, and who absents himself from a conflicted transaction—is subject to entire fairness review as a fiduciary solely because he is a respected figure with a potential to assert influence over the directors, is not Delaware law.”  Instead, the Court held, “a plaintiff must show that the alleged controlling stockholder in actuality dominated the corporate conduct, either generally or with respect to the transaction in question.”  The Court concluded that the evidence did not support such a finding of control.