#11128 - Duties Of Controlling Shareholders - Corporations

Duties of Controlling Shareholders

1. Arises in three situations

   1. (1) Transactions Within the Corporate Group (e.g. parent-subsidiary dealings and dealings between the subsidiary and other corporations controlled by the parent (affiliates)

   2. (2) Cashing Out of the Minority Shareholders

      1. (1) Cash-Out Merger (most common)

         • The parent corporation uses its control of the subsidiary's board and its voting majority to arrange a merger typically between the partially-owned subsidiary and a wholly-owned corporation of the parent. In the process the minority shareholders receive cash in the merger or, if they are dissatisfied with the merger terms, in a judicial appraisal.

      2. (2) Tender Offer Followed by the Short-Form Merger

         • A bidder corporation (sometimes already with a controlling interest) makes a tender offer conditioned on acquiring at least 90 percent of a corporation's stock. If successful, the bidder then merges with the corporation under a streamlined procedure that only requires the approval of the parent corporation's board of directors.

      3. (3) Sale to Outside Buyer

         • The parent corporation, rather than acquiring 100 percent ownership of the subsidiary, arranges for the subsidiary to be merged with an outside buyer. In the merger, the parent corporation and minority shareholders receive consideration as specified in the merger plan

   3. (3) Negotiated Sales of Control (NOT COVERED)

2. Rules

   1. "A parent does indeed owe a fiduciary duty to its subsidiary when there are parent-subsidiary dealings." Sinclair Oil Corp. v. Levien - pg. 865

   2. The intrinsic fairness standard "will be applied only when the fiduciary duty is accompanied by self-dealing." Sinclair Oil Corp. v. Levien - pg. 865

      1. "Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary." Sinclair Oil Corp. v. Levien - pg. 865

   3. "[E]ven though the ultimate burden of proof is on the majority shareholder to show by a preponderance of the evidence that the transaction is fair, it is first the burden of the plaintiff attacking the merger to demonstrate some basis for invoking the fairness obligation." Weinberger v. UOP, Inc. - pg. 873

      1. The plaintiff must "allege specific acts of fraud, misrepresentation or items of misconduct to demonstrate the unfairness of the merger to the minority." Weinberger v. UOP, Inc. - pg. 873

   4. An approval of the transaction by an independent committee of directors or an informed majority of the minority shareholders shifts the burden of proof on the issue of fairness from the controlling or dominating shareholder to the challenging shareholder-plaintiff. Kahn v. Lynch Communication Sys., Inc.

      1. BUT, the mere existence of an independent special committee does not itself shift the burden. At least two factors are required: (1) the majority shareholder must not dictate the terms of the merger; (2) the special committee must have real bargaining power that it can exercise with the majority shareholder on an arms length basis. Kahn v. Lynch Communication Sys., Inc.

   5. "However, where corporate action has been approved by an informed vote of a majority of the minority shareholders, . . . the burden entirely shifts to the plaintiff to show that the transaction was unfair to the minority." Weinberger v. UOP, Inc. - pg. 873

      1. "But in all this, the burden clearly remains on those relying on the vote to show that they completely disclosed all material facts relevant to the transaction." Weinberger v. UOP, Inc. - pg. 873

   6. Entire Fairness Standard:

      1. "The concept of fairness has to basic aspects: (1) fair dealing and (2) fair price." Weinberger v. UOP, Inc. - pg. 881

         • Fair dealing "embraces the questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained." Weinberger v. UOP, Inc. - pg. 881

           • Some Courts have held that failure to make full disclosure constitutes per se unfairness. See State ex rel. Hayes Oyster Co. v. Keypoint Oyster Co.

         • Fair price "relates to the economic and...