Controlling Stockholder’s Fiduciary Obligations

A. Disputes between Classes of Shares

1. Where there is a dispute between classes of shares we look at the contract rather than fiduciary duty. (Zahn v. Transamerica Corp)

2. courts will

   1. look at the SH agreement to see if the parties expressly contracted the alleged right

   2. if not, court will determine if the right is implied-as-contracted, for reason that the parties contracted for some other express right, which would be vitiated were this right not implied.

      1. Del courts will only imply contract terms when the party asserting the implication proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected

   3. Another theory: implied obligation of good faith: one party cannot purposefully defeat a provision of the contract that was expressly contracted for by the counterparty.

B. Disclosure Obligations

1. In Del. a corporation’s controlling SH has a fiduciary obligation to disclose all material information when the controlling SH is asking the minority SH to act (such as by voting or manifesting consent)

2. In Del., directors and officers also have such a duty of disclosure to minority SH

C. Exercising Influence

1. Background- three tests

   1. most deferential standard: the business judgment rule. It is the default standard. The business judgment rule provides a rebuttable presumption that in making a business decision the directors of a corporation be independent, acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company

   2. Unocal and Revlon standards

      1. When are you in the Revlon Moment? Three situations.

         1. Change of Control: Effect of plan supported by bd. is to bring about a change in control of the corporation.

         2. Occurs whenever “an amount of target shares that is sufficient to control the target” is acquired:

            • By a third party for cash or non-voting securities; OR,

            • For voting securities of an entity who after such acquisition will itself be controlled by a third party.

         3. So NO Revlon moment if you are SH of new company after the transaction, and the new company does not have a controlling SH.

      2. The Unocal standard:

         1. if board is taking a defensive measure (like blocking a tender offer), directors must demonstrate that the board was (1) independent, (2) has reasonable investigation (for coercion), and (3) has a rational basis (i.e. there is a threat of take-over)

         2. The response must be reasonable in relation to the threat. The response cannot be coercive.

         3. Unocal test applies before the Revlon moment

      3. Revlon standard

         1. applies once the target board enters the Revlon moment.

         2. the board’s role changes from defense to auctioneer and has the responsibility to get the best offer.

   3. The entire fairness standard:

      1. triggered "where a majority of the directors approving the transaction were interested or where a majority stockholder stands on both sides of the transaction." Directors can be found to be interested if they "appear on both sides of a transaction [or] expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which...

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