Chancery Court Indicates Willingness to Extend M&F to Compensation Award to Controlling Stockholder
Robert S. Reder & Alexandra N. Bakalar | 73 Vand. L. Rev. En Banc 61 (2020) |
“Delaware courts are tasked with reviewing breach of fiduciary duty claims arising from a variety of commercial transactions. No matter the type of transaction, however, the standard of review applied by the court is all-important to the disposition of the claim at the pleading stage. If the court reviews corporate conduct under the deferential business judgment rule, “the claim is unlikely to proceed beyond the proverbial starting line.” If, on the other hand, the court reviews the conduct under the heightened entire fairness standard, “the claim is likely to proceed at least through discovery, if not trial.” In fact, it is often said that selection of the “standard of review . . . will be outcome determinative.” See Tornetta v. Musk, C.A. No. 2018-0408-JRS, 2019 WL 456693 (Del. Ch. Sept. 20, 2019) (“Tornetta”).
On one side of the ledger, a board of directors’ decision regarding executive compensation “is about as work-a-day as board decisions get.” As such, they are typically “entitled to great judicial deference.” “[E]ven greater deference” is extended when stockholders ratify the compensation decision. On the other side of the ledger, when a challenged transaction benefits the controlling stockholder of a corporation, a Delaware court typically applies the entire fairness standard of review. According to a long line of Delaware cases, controlling stockholders can “exert coercive influence over the board and unaffiliated stockholders,” posing a substantial risk to “sound corporate governance.” Accordingly, “[Delaware] law has required that [these transactions] be reviewed for substantive fairness even if the transaction was negotiated by independent directors or approved by the minority stockholders.” Thus, under the iconic Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), the controlling stockholder must carry the burden of proving entire fairness—that is, the transaction exhibited both fair dealing and fair price.”