Academic journal article Vanderbilt Law Review

After Corwin: Down the Controlling Shareholder Rabbit Hole

Academic journal article Vanderbilt Law Review

After Corwin: Down the Controlling Shareholder Rabbit Hole

Article excerpt

Introduction

Corporate law has an uneasy relationship with controlling shareholders. Corporations are designed to vest management authority in corporate directors and officers rather than shareholders,1 on the assumption that shareholders are too inexpert-and their preferences too divergent-to trust to make business decisions.2 Left to their devices, shareholders may drain wealth from the corporation in order to satisfy their private interests.3 For this reason, it is often said that directors of a corporation may advance what, in their judgment, are the corporation's best interests, even over the objections of shareholders themselves.4

At the same time, managers may shirk their responsibilities or leech wealth at the stockholders' expense, and a dispersed and passive shareholder base may be incapable of adequately policing them. In these circumstances, controlling shareholders have the expertise and incentives to discipline management and ensure their focus on maximizing shareholder returns.5 Yet controlling shareholders-like any other shareholder-may also have interests that diverge from the minority and seek to "tunnel" private benefits to themselves by exploiting their informational advantages and influence over directors.6 As a result, the law has taken an intermediate position with respect to these controllers: they have the right to vote and dispose of their shares to advance their own interests,7 but at the same time, they owe a fiduciary duty to the minority shareholders and may not use their control over the corporate machinery to extract private benefits.8

As Delaware has developed its doctrine with respect to controlling shareholders, its view of their relationship to directors has evolved. This evolution has produced some pronounced inconsistencies with respect to the weight placed on director approval of controlling shareholder action.9 As a result, Delaware attempted to simplify its law in a series of decisions in 2014 and 2015. In Corwin v. KKR Financial Holdings LLC10 and its progeny, the Delaware Supreme Court held that, so long as a transaction does not involve a conflicted controlling stockholder, the uncoerced, fully informed vote of disinterested stockholders will cleanse a breach of fiduciary duty by corporate directors in the event of a subsequent shareholder lawsuit. Meanwhile, Kahn v. M & F Worldwide Corp.11 ("MFW"), set up an alternative scheme for controlling stockholder transactions, allowing them to be cleansed-and thus freed from judicial scrutiny if later challenged in court-only if the deal is negotiated and approved by disinterested and independent directors, and conditioned at the outset on the uncoerced vote of disinterested stockholders. Finally, C & J Energy Services, Inc. v. City of Miami General Employees' and Sanitation Employees' Retirement Trust12 ("C & J Energy ') sharply limited courts' ability to interfere with a pending shareholder vote; thus, so long as appropriate disclosures are made, even agreements reached in violation of directors' fiduciary duties will be presented to stockholders. The net effect is that, at least in certain contexts, the determination whether a transaction involves a controlling shareholder is practically outcome-determinative of shareholder disputes: if a controlling shareholder is present, there is the potential for close court examination to ensure fairness to the minority; if there is not, any shareholder challenge is likely to be dismissed without even the chance for discovery.

Yet even as the presence or absence of a controlling shareholder takes on heightened significance, changes in the business landscape have made controllers more difficult to identify. More companies are adopting multiclass capital structures both in public and private markets,13 and the popularity of management buyouts means that shareholders with significant stakes, ties to directors, and informational advantages are often placed across the bargaining table from the companies in which they have invested. …

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