Monthly Archives: November 2019

In the past quarter, two important Court of Chancery decisions—Tornetta and BGC—have highlighted the “reflexive skepticism” with which the Delaware courts approach transactions involving conflicted controllers.

• In Tornetta, a case of first impression according to the court, Vice Chancellor Slights held that unless a board’s decision on executive compensation for a controlling stockholder-CEO complies with the protections outlined in the seminal MFW decision, the entire fairness standard of review (which is the strictest standard) applies to the court’s evaluation of a stockholder challenge to the compensation. The court so decided notwithstanding that, until now, a) business judgment review has applied to compensation decisions made by independent directors and b) MFW-compliance has been required for business judgment review of conflicted controller transactions only in the context of transactions that are “transformational” for the corporation.
• In BGC, Chancellor Bouchard applied what seems to be a more stringent standard than in the past for evaluating whether putatively independent directors can be presumed to be capable of acting independently from a controller in the context of evaluating demand (“Demand futility” means that a stockholder who wishes to bring claims against a controller need not first make a demand on the board—for the board to bring the claims on behalf of the corporation—if doing so would be “futile” because the directors’ conflicts or lack of “independence” suggest that they might not be capable of making the decision impartially.) The Chancellor appeared to focus on the sense of owingness that a director could feel toward a controller if the director’s general status or positions of importance in the company or the community were a result of his or her connection with the controller.

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