Delaware Vice Chancellor Travis Laster argues that Delaware law reflects an action versus no action distinction, under which fiduciary duties do not apply when a controller acts to preserve the status quo, such as by voting against a proposed transaction, but do apply when the controller alters the status quo, as by voting to approve a proposed transaction. Travis Laster, Stockholder Votes, Linkedin.com (Feb. 19, 2024), https://www.linkedin.com/pulse/dispatch-from-tampa-sears-mundane-stockholder-votes-travis-laster-0mcle/. Even if we accept that as an accurate statement of Delaware law, however, Laster rightly acknowledges that it is not a tenable distinction.
Laster offers an example in which a controlling shareholder is committing fraud—ala Bernie Madoff—with the assistance of the firm’s current outside auditor. Id. If the controller votes to retain the auditor, thereby preserving the status quo, under Laster’s interpretation of the law, fiduciary duties would not apply. Id. Accordingly, Laster proposes an alternative regime that “would start by applying the business judgment rule, then assess whether the plaintiff had alleged facts sufficient to rebut one of its presumptions, which the auditor vote might well satisfy.” Id.
I disagree with Laster. Neither the action/no action distinction nor Laster’s proposed replacement get to the heart of the matter. What I propose is (1) we narrow the definition of controller; (2) a controller always owes fiduciary duties to the minority; (3) we narrow the class of cases under which entire fairness is the standard of review.
Laster also suggests that there may be cases in which the appropriate standard of review would be enhanced scrutiny, as where “the controller is acting unilaterally to remove an incumbent director and fill the vacancy with someone else.” Laster, supra. In such a case, the controller is “interven[ing] in the domain generally reserved for board action, warranting enhanced scrutiny.” Id. The proposal strikes me as problematic for two reasons. First, hinging the standard of review on whether the shareholder is using the vote strikes at the heart of the controller’s right of selfish ownership. The right to vote in one’s own self-interest is a core element of ownership. See Gilbert v. Perlman, No. CV 2018-0453-SG, 2020 WL 2062285, at *1 (Del. Ch. Apr. 29, 2020) (“Corporate controllers . . . may vote their stock, and take other actions with respect to the entity, in their own self-interest free of fiduciary strictures, so long as they do not employ the corporate machinery itself.”). Second, Laster’s test introduces considerable uncertainty by conditioning the standard of review on the extent to which the controlling shareholder intrudes on the board’s sphere of action. See Laster, supra (“If the intervention seemed more significant and designed to invade the board’s domain, then I would be inclined to apply enhanced scrutiny.”).
