Delaware Corporate Law Myth-Busting: The “Expanding Definition” of Controlling Stockholder

This note is the first in a series intended to bust several burgeoning myths about the history and trajectory of Delaware common law governing controlling stockholders.  These myths are being framed as new and dangerous problems that must be solved if Delaware is to remain the preferred domicile in the United States for corporations, and especially for controlled corporations.  In the words of one commentator, “Delaware courts need a course correction” because “[t]hey have pushed the law governing controlling shareholders far beyond legitimate policing into unnecessary and unwise overregulation.”[1]

We argue that the as-framed “problems” are not new, dangerous, or real.  The judicial decisions on which the commentators seize uphold Delaware law’s uncontroversial purpose to minimize agency costs, including by preventing or remedying controllers’ tunneling of value away from corporations and their minority stockholders.  Rather than a dramatic or unexpected shift in the law of controllers, the decisions represent a conservative and common-sense application of longstanding equitable principles.  The result is a clear and approachable framework that appropriately accounts for the ways control rights are allocated in modern corporations.  That makes for both good law and good policy and best facilitates wealth creation.

We reach those conclusions based on careful examinations of the facts, legal reasoning, and holdings of the criticized decisions and extensive precedent on which they rely.  While one could detail those examinations in a longer format, we offer here a general overview of why certain myths about Delaware law governing controlling stockholders are unfounded.

The first short-form installment follows.

Myth No. 1:  The definition of a controlling stockholder under Delaware law is expanding unpredictably.

Truth No. 1:  Delaware courts are applying well-settled legal principles from decades-old lines of precedent to reach predictable holdings about whether any given person owes fiduciary duties in a particular circumstance.

Some factions of the corporate bar and the academy are abuzz with warnings that the definition of a controlling stockholder under Delaware law is expanding.  That supposedly-expanding definition is ostensibly creating harmful uncertainty for corporate actors and their advisors.  Professor Bainbridge summarizes the position well:  “The broadening definition of controller poses a number of concerns,” including “increased legal uncertainty,” the likelihood of “increased litigation,” and increased risk of “chilling investment and shareholder participation.”[2]

Much of the criticism espousing that position focuses on only a few judicial decisions and lacks empirical support.[3]  For example, we have seen no effort to provide statistical evidence that (i) the volume of cases that survive a motion to dismiss based on judicial categorization of a defendant as a controlling stockholder has meaningfully increased over any period[4] or, as would be required to support the commentators’ hypothesis, (ii) the volume of cases that survive a motion to dismiss based on judicial categorization of a defendant as a controlling stockholder has increased as a percentage of transactions in which a large (but less than 50%) blockholder either stands on both sides of the transaction or receives a non-ratable benefit.[5]  Instead, the commentators make qualitative statements espousing their views about the direction of Delaware’s controlling stockholder law based on a small number of decisions and without any broader support.[6]

Nevertheless, assuming for the sake of argument that there has been some increase in the volume of conflicted controller cases surviving a motion to dismiss (or that such an increase is likely), the premise of the commentators’ argument—that the definition of controller is broadening dangerously and unpredictably—is simply incorrect.

Delaware law has long held that a person can be a controller either by: (1) holding a majority of voting power (i.e., hard control), or (2) holding actual control over the corporation’s business and affairs.  E.g., Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113 (Del. 1994) (a stockholder owes fiduciary duties “if it owns a majority interest in or exercises control over the business affairs of the corporation”) (emphasis added) (quoting Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987)); see also Guth v. Loft, Inc., 5 A.2d 503, 506 (Del. 1939) (company president “dominated [the corporation] through his control of the Board of Directors”); cf. Robbins & Co. v. A. C. Israel Enterprises, Inc., 1985 WL 149627, at *5 (Del. Ch. Oct. 2, 1985) (collecting authorities and explaining that “[t]his Court and others have recognized that substantial minority interests ranging from 20% to 40% often provide the holder with working control”) (cited by, inter alia, Voigt v. Metcalf, 2020 WL 614999, at *19 n.20 (Del. Ch. Feb. 10, 2020)).  And Delaware law has likewise long held that actual control can be general or transaction-specific.  See, e.g., Lynch, 638 A.2d at 1114 (a substantial minority stockholder exercised actual control over the corporation “at least with respect to the matters under consideration” at a particular board meeting).

None of the recent myth-engendering Delaware decisions, to our knowledge, contains findings of actual general control.  The raw nerve must therefore lie in the realm of actual transaction-specific control.

As stated above, the concept of actual transaction-specific control has been around for at least thirty years.  It was perhaps best summarized by Vice Chancellor Laster more than six years ago in Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, 2018 WL 3326693, at *25-26 (Del. Ch. July 6, 2018), aff’d sub nom. Davenport v. Basho Techs. Holdco B, LLC, 221 A.3d 100 (Del. 2019).  Basho, in turn, surveyed Delaware law on general and transaction-specific control and cited Delaware Supreme Court cases like Lynch, a slew of Court of Chancery decisions issued between 2000 and 2018 by various Chancellors and Vice Chancellors, and several respected treatises.  See id. at *25-28 & nn.303-25 (citing, inter alia, Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *6 (Del. Ch. June 5, 2006) (Chandler, C.); In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 553 (Del. Ch. 2003) (Strine, V.C.); In re Primedia Inc. Deriv. Litig., 910 A.2d 248, 257 (Del. Ch. 2006) (Lamb, V.C.); American Law Institute, Principles of Corporate Governance § 1.10(a)(2) (1994); 1 Stephen A. Radin, The Business Judgment Rule 1129 (6th ed. 2009)).

In Basho, a significant investor (Georgetown) gained blocking rights through a series of preferred stock financings in a startup company (Basho), giving Georgetown the ability to direct—or prevent—Basho’s fundraising efforts at a time when Basho was on the verge of running out of money.  Although not a “hard” controller, Georgetown used its contractual blocking rights to cut off Basho’s access to other sources of financing, spread misinformation, engage in combative behavior to eliminate any financing alternatives, and threaten management who tried to raise alternative sources of capital that would reduce Georgetown’s influence.  Ultimately, Georgetown successfully forced through a Series G financing round that was highly favorable to Georgetown and unfair to Basho and its other investors.

The Basho court, after reviewing extensive precedent, determined that Georgetown had exerted transaction-specific control over Basho and therefore owed fiduciary duties in connection with the Series G financing round.  In reaching its control determination, the court observed that “[i]t is impossible to identify or foresee all of the possible sources of influence that could contribute to a finding of actual control over a particular decision.”  2018 WL 3326693, at *26.  The court then identified a non-exhaustive list of factors relevant to the question of actual transaction-specific control, including:

• Stock ownership;
• Right to designate directors;
• Decisional rules in governance documents that confer board-level power;
• High-status roles like CEO, Chairman, or founder;
• relationships with particular directors that compromise their disinterestedness or independence;
• relationships with key managers or advisors who play a critical role in presenting options, providing information, and making recommendations;
• the exercise of contractual rights to channel the corporation into a particular outcome by blocking or restricting other paths; and
• the existence of commercial relationships that provide the defendant with leverage over the corporation, such as status as a key customer or supplier.

2018 WL 3326693, at *26-27.

These factors are necessarily fact- and context-specific.  But again, this is not new:  in the actual control context, “[t]he question whether a shareholder is a controlling one is highly contextualized and is difficult to resolve based solely on the complaint.”  Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *6 (Del. Ch. June 5, 2006) (Chandler, C.) (emphasis added); see also Cysive, 836 A.2d at 550-51 (“Because the question of whether a large block holder is so powerful as to have obtained the status of a ‘controlling stockholder’ is intensely factual, it is a difficult one to resolve on the pleadings.”).

Determining the applicable standard of review based on a factual and context-specific analysis is a feature of equity.  “[A] court of equity generally does not favor bright-line rules, instead using its discretion to make decisions on a case-by-case basis.”  Park Emps.’ & Ret. Bd. Emps.’ Annuity & Benefit Fund of Chi. v. Smith, 2016 WL 3223395, at *10 (Del. Ch. May 31, 2016) (Glasscock, V.C.).  Flexibility is necessary to enable the Court to address wrongdoing where stockholders who lack “hard control” use their influence over the corporate machinery to obtain preferential treatment or extract non-ratable benefits from the company and its stockholders.  Policing that type of behavior by significant blockholders is more important today than it was 30 years ago, in part because “corporate control rights are increasingly allocated in unique and idiosyncratic ways, making a simple ‘50%’ metric inadequate to assess controlling stockholder status.”[7]

Absent a finding of transaction-specific control, stockholders might lack redress for clearly inequitable and value-diminishing conduct directed by significant stockholders for self-interested reasons.  For instance, the conduct undertaken by Georgetown in Basho was clearly self-interested, subverted the will of management, and harmed unaffiliated stockholders.  We can think of no reason why eliminating that avenue of recourse (and thus encouraging that sort of behavior) is socially useful or facilitates wealth creation.

Other decisions weighing allegations of actual transaction-specific control have likewise addressed clearly inequitable and value-diminishing conduct.  For example:

• In Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited, 2020 WL 881544 (Del. Ch. Feb. 24, 2020), then-Vice Chancellor Slights held for pleading-stage purposes that two significant minority equityholders in a Delaware limited liability company together leveraged their contractual blocking rights to “steer” the company “off the cliff” and “into the bankruptcy ravine below,” including by preventing other investors from making capital contributions, “which, predictably, bankrupted [the company’s] sole asset.”  Id. at *27.  Relying on Basho, the Skye Mineral court noted that a stockholder’s ability to “channel the corporation into a particular outcome” is a factor that can “contribute to an inference of control.”  Id.[8]
• In In re Pattern Energy Group inc. Stockholders Litigation, 2021 WL 1812674 (Del. Ch. May 6, 2021), Vice Chancellor Zurn grappled with allegations of transaction-specific control against a group of minority stockholders who together held slightly more than 10% of a corporation’s stock (certain members of the group held no stock) and allegedly caused the company to select, in a sale process, an inferior buyer whose proposal accomplished the minority group’s goals to the company’s detriment.  Relying on Basho and Skye Mineral, the court engaged in a careful and detailed analysis discussing three sources of the group’s alleged “soft” control:  (1) close relationships with the company’s founders and executive management, (2) control over an entity that comprised “an essential part of the Company’s upstream supply chain,” and (3) contractual veto rights over the relevant transaction.  Id. at *43-44.  While the court declined to “make a definitive determination” that the alleged control group owed fiduciary duties in connection with the sale process, it permitted the plaintiffs’ control-based claim to proceed past the pleadings stage.  See id. at *45-46.

Skye Mineral and In re Pattern Energy both contain nuanced and thoughtful analyses of allegations of actual transaction-specific control based on Basho.  We submit that this trio (and other decisions applying Basho) exemplifies the common law developing as it should—on a case-by-case basis, under a systematic and logical framework, to address unique fact patterns that present real concerns of inequitable and value-diminishing conduct.

Drawing bright-line rules or paring back actual transaction-specific control findings would be particularly troubling in a business climate increasingly populated by venture capital and private equity firms with idiosyncratic capital structures and individualized rights, as scholars have addressed.[9]  Against that backdrop, it is easy to conceive of scenarios in which blockholders with significant contractual rights will benefit themselves at other stockholders’ expense.  Consider one simplified example that mirrors a recent case: (i) a board agrees to a merger that it determines will add billions of dollars of value for the benefit of all stockholders; (ii) a blockholder with a veto right threatens to exercise its right unless the company agrees to pay him $1 billion; and (iii) to secure the merger, the board gives in, agreeing to the massive side payment.

Should stockholders have recourse in that scenario?  We submit that they should, but under the commentators’ view of the world, they would not.  And any attempt to draw a bright line that would capture that conduct but leave other holes in the law would ultimately lead to the same outcome.  Cf. In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *23 (Del. Ch. Jan. 25, 2016) (“If a lower standard of review applies to one type of transaction…, then controllers will use that route to move value.”).  Fortunately, we are aware of no Delaware decision that has attempted to limit the set of factors relevant to a finding of actual transaction-specific control.  We are also unaware that anyone has taken a position that any of the above-listed factors from Basho cannot be relevant in a transaction-specific control analysis.  And, of course, the Delaware Supreme Court affirmed the Court of Chancery’s judgment in Basho and recently cited Basho favorably, including its articulation of the law on actual transaction-specific control.  See, e.g., In re Oracle Corp. Derivative Litig., 2025 WL 249066, at *12-13 (Del. Jan. 21, 2025).

In addition to not being a new legal concept, actual transaction-specific control has always been hard to prove.  See, e.g., In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006) (Strine, V.C.) (observing that the transaction-specific control test is “not an easy one to satisfy and stockholders with very potent clout have been deemed, in thoughtful decisions, to fall short of the mark”).  And it remains hard to prove.  For example, the Court of Chancery rejected allegations of transaction-specific control recently in Scianella v. AstraZeneca UK Ltd., 2024 WL 3327765, *16-26 (Del. Ch. July 8, 2024), in which Vice Chancellor Fioravanti cited many of the same cases and all of the same legal standards discussed above and applied them to different facts to reach a different holding on the question of whether a substantial stockholder held actual transaction-specific control.  Even more recently, the Delaware Supreme Court upheld the Court of Chancery’s post-trial determination that Larry Ellison, the visionary founder of Oracle, did not exert transaction-specific control over Oracle’s acquisition of NetSuite Inc.  In re Oracle, 2025 WL 249066, at *13.

After reflecting on both the outcry over the supposed expansion of the definition of controlling stockholder under Delaware law and the decisions giving rise to it, we conclude that  the outcry appears to be driven more by dislike of those decisions’ outcomes than by real disagreements with their applications of legal principles.  As one of our colleagues in the stockholders’ bar has pointed out, nary a criticism from the corporate defense bar followed the court’s control-related decisions over the last several years holding for defendants.  And we do not expect much, if any, criticism of the Delaware Supreme Court’s Oracle decision.

At bottom, there is a vast difference between (i) carefully applying well-settled legal and equitable principles to bespoke fact patterns to reach results with which some people disagree, and (ii) expanding common law definitions in a destabilizing way.  When levied, accusations of the latter should be accompanied by vigorous engagement with either the criticized decisions themselves or the ample and long-standing precedent on which they rely.  We assert that such engagement defeats the accusations and busts the myths the accusers advance.

This article was completed prior to the introduction of SB21 in the Delaware state legislature. The authors of this article believe the assertions and analyses contained herein are more relevant than ever in light of SB21’s introduction and hope the article leads to more informed debate on the legal and policy issues surrounding the bill.