Anthony Rickey recently posted some comments on my article A Course Correction for Controlling Shareholder Transactions, for which I am grateful.
I am glad that Anthony found the piece thought-provoking, and I appreciate the depth of his commentary on its implications and its intersections with broader debates in corporate law. So let me briefly address some of the points he raised.
The Impermanence of Judicial Solutions
Anthony's concern about the durability of a reinvigorated Sinclair Oil test is well-taken. Judicial standards can indeed evolve—or erode—over time. However, my argument rests on the premise that Delaware’s jurisprudence thrives on its adaptability. By adopting a more predictable threshold for triggering entire fairness, we provide a stronger foundation for controllers and minority stockholders alike. While I acknowledge that this foundation may not be eternal, the legal community—particularly transactional attorneys—can help fortify it through practice norms and contractual safeguards.
His observation about Nevada’s statutory approach is also well-taken. While I did not wholly ignore the implications of competitive federalism, my focus in this article remained on Delaware’s unique position in corporate law. I did, however, briefly discuss Nevada’s statutory protections in my article DExit Drivers: Is Delaware's Dominance Threatened?:
It is not clear that reincorporating out of Delaware will provide controllers with significant liability protection. Nevada’s fiduciary duty statute applies only to directors and officers, leaving controller liability to case law. See Nev. Rev. Stat. § 78.138 (“The fiduciary duties of directors and officers . . ..”). But there is very little Nevada case law on point. In Cohen v. Mirage Resorts, Inc., 62 P.3d 720 (Nev. 2003), the Nevada Supreme Court held that minority shareholders could seek damages for breach of fiduciary duty if a “merger was accomplished through the wrongful conduct of majority shareholders,” citing a Delaware case as support for that proposition. Id. at 727 (citing Parnes v. Bally Entertainment Corp., 722 A.2d 1243, 1245 (Del.1999)). See also Guzman v. Johnson, 483 P.3d 531, 538 (Nev. 2021) (discussing fiduciary duty of controlling shareholder in connection with a merger). The court offered no guidance as to the definition of a controlling shareholder or the standard of review applicable to conflicted controller transactions.
In Peddie v. Spot Devices, Inc., 2019 WL 13324088, at *6 (Nev.Dist.Ct.), the court discussed the definition of controlling shareholder, citing Delaware precedents for the proposition that “a minority shareholder exercising actual control over a corporation may be deemed a controlling shareholder with a concomitant fiduciary duty to the corporation and other shareholders.” Id. at *6. In doing so, the court noted that “Nevada courts frequently look to [Delaware law to] determine corporate questions.” Id. The court did not specify the standard of review applicable to conflicted controller transactions.
The U.S. District Court for the District of Nevada predicted that the Nevada Supreme Court would look to Delaware law for guidance on conflicted controller transactions. See Brown v. Kinross Gold U.S.A., Inc., 531 F. Supp. 2d 1234, 1245 (D. Nev. 2008) (“Because the Nevada Supreme Court frequently looks to the Delaware Supreme Court and the Delaware Courts of Chancery as persuasive authorities on questions of corporation law, this Court often looks to those sources to predict how the Nevada Supreme Court would decide the question.”). The transaction before the court involved a tender offer by a controlling shareholder for all of the corporation’s outstanding preferred stock. Id. at 1239. Citing Delaware precedents, the court predicted Nevada would apply the entire fairness standard if the offer were deemed coercive. Id. at 1245.
In sum, the case law does not support the proposition that Nevada law is more protective of controlling shareholders than is Delaware law. To the contrary, it suggests that Nevada courts are likely to apply the Delaware standards with respect to who is a controller, what standard of review is applicable to conflicted controller transactions, and how such transactions may be cleansed. The paucity of pertinent case law also calls into question the extent to which Nevada law can compete with that of Delaware on factors such as comprehensiveness and determinacy. Accordingly, predictions that other controllers will follow Musk out of Delaware likely are overstated.
By the way, look for future blog posts responding to some points Keith Paul Bishop has made on this issue.
A Division in the Corporate Bar
Anthony's analysis of fissures within the Delaware bar due to controller-skeptical rulings is insightful. I agree that these decisions may strain traditional “Delaware Way” norms. However, I view Course Correction as an opportunity to realign those norms with the expectations of modern market participants. Addressing the discontent of transactional lawyers who counsel founders on the stability of Delaware law is, in part, the impetus for this work. By promoting a more predictable standard, my proposal aims to restore trust in Delaware as the optimal forum for controlled companies.
Anthony's request for a deeper dive into the political economy of Delaware’s corporate bar, akin to my earlier work in Fee Shifting: Delaware's Self-Inflicted Wound, is flattering and well-noted. While Course Correction concentrates on doctrinal refinement, I see fertile ground for exploring the broader implications of Delaware’s legal-political landscape in future scholarship. His observations about plaintiff-side adaptability and the jurisdictional stickiness of defense lawyers present valuable avenues for further exploration.
Practitioner Anonymity and the Broader Debate
Finally, I appreciate Anthony's reflections on the use of anonymized practitioner insights. Suffice it to say that the lawyers I quoted are known figures for whose views I have great respect. Their anonymity reflects not just a practical concern but also the delicate balance practitioners must strike in a contentious field. While it limits the color of the narrative, it ensures that the conversation remains substantive and inclusive.
