Control and Its Discontents

A series of recent Delaware decisions highlights the Delaware courts’ growing skepticism toward corporate actions in controlled companies. We analyze these decisions, noting their application to what we term “new” control situations and the per se application of fiduciary duties and entire fairness to controllers. We contend that this application contradicts both the theoretical and economic justifications for limiting the fiduciary duties of controllers, particularly when they undertake actions in their capacity as shareholders. We argue that, outside the context of freeze-outs and similar transactions, strict scrutiny is both economically unnecessary and impractical. We further argue that controlling shareholders acting in their capacity as shareholders should not be considered fiduciaries. Instead, we propose that Delaware defer to existing market forces and structural safeguards. To address the risk of board domination, we propose that where a controller has plausibly distorted the board process, the decision be subject to intermediate scrutiny. To further strengthen the incentives of directors to resist such domination, we propose a greater focus on the actions of dominated directors who favor the interests of a controller over those of the corporation.