On October 24, in the 2023 Distinguished Jurist Lecture, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery explored the limitations of the fiduciary duties that a controlling shareholder owes a company.
In the talk, presented by the Institute for Corporate Governance & Finance and titled “The Controlling Stockholder as Bare-Bones Fiduciary,” Laster drew a contrast between the fiduciary duties of corporate directors and those of controlling shareholders, and argued that courts should take greater note of the difference.
“I am fascinated by the persistent inconsistencies in Delaware law,” said Laster, who has served on the Court of Chancery since 2009. “Delaware posits that a controlling stockholder owes the same fiduciary duties as directors. That sounds plausible. Both are corporate fiduciaries. Why wouldn’t they owe the same duties? But it turns out not to be true—and not by a long shot. At bottom, all a controller owes is a duty of non harm. A controller is thus a barebones fiduciary, owing the minimum duty that one can owe to another and still have the relationship termed ‘fiduciary’.”
As an example, Laster posited a squeeze-out merger, an acquisition in which a company’s minority shareholders must sell their shares to a controlling stockholder at a fair price. The directors of the subsidiary board owe the full range of fiduciary duties, he noted, including exercising due care and acting in good faith. But the controlling shareholder’s duties are different: “The duty of care drops away because the controller in the setting has no obligation to look out for and exercise care on behalf of the corporation…. It's the directors who have to act with care, not their counterparty,” Laster said. “More importantly, the controlling stockholder has no obligation to believe that the merger itself is in the best interests of the company. The controller's sole obligation is to offer terms that are fair.”
Unlike duties owed by a board of directors, which are both prescriptive and proscriptive, the controlling stockholder’s duties are proscriptive only, Laster said: “The fact that a controller can refuse to sell its shares into a value-maximizing transaction, refuse to vote in favor of value maximizing transaction, and take other actions to protect itself from a course of action that an independent board believes is value-maximizing demonstrates that a controller cannot have an affirmative duty.”
Posted on November 15, 2023