(Article from Securities Law Alert, May/June 2019)
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On May 29, 2019, the Delaware Chancery Court dismissed breach of fiduciary duty claims brought by a company against two minority stockholders who allegedly embarked on “a bad faith campaign intended solely to disrupt [the company’s] business operations with the hopes that [they] could gain control of [the company] or force a buy-out of their interest in [the company].” Klein v. Wasserman, 2019 WL 2296027 (Del. Ch. 2019) (McCormick, V.C.). The court found the complaint “does not adequately allege facts sufficient to impose fiduciary duties on the [minority stockholders] as controllers.” The court recognized that “[s]ome theories posit that chronic disruption could rise to the level of control,” but held that the allegations in the case before it did “not support such a holding.” The court found it significant that the complaint “describes [the minority stockholders] as on a ‘quest’ for control, not wielding control.”
The court explained that even if a stockholder does not own a majority of the company’s shares, the stockholder may nevertheless be considered a controller if the stockholder “exercises actual control . . . over the business and affairs of the corporation.” Such actual control can be shown to exist through pleadings that a minority shareholder controlled (i) the board generally or (ii) the decision-makers with regard to a particular transaction or decision. The court found the complaint did not allege that the minority stockholders had general control over the company, as they “own a 20% voting interest, do not hold any office or management position at [the company], are not [company] directors, and, at most, control one of three Board members.”
With respect to the “decision-specific control theory,” the court explained that, “at a minimum, a plaintiff must identify a decision or transaction.” The court found the complaint was “vague as to the decision or particular outcome that the [minority stockholders] successfully achieved.” The court observed that the minority stockholders “never achieved” their alleged “sole goal,” which was “to monetize their individual investment as soon as possible and obtain a buyout of their interests.”
The court noted that “[t]heoretically, actions implementing aspects of a larger strategy could themselves supply the particular outcomes to support a theory of decision-specific control.” Here, the company argued that the minority stockholders exercised control by, inter alia, influencing one of the board members to “wield[ ] his contractual blocking rights to foreclose capital infusions.” The court found this allegation insufficient to demonstrate control because the company did not identify “any specific transactions presented to or rejected by the Board.”
However, the court declined to dismiss a breach of fiduciary duty claim against the director who allegedly “acted in bad faith by placing the interests of the [minority stockholders] above the interests of [the company].” The court found the complaint stated a claim against the director even though “the Board did not consummate any transaction that [the director] demanded.” The court found the complaint “pled harm” to the company by alleging that the director’s actions led to the resignation of company employees and filing delays, and “caused internal disruption and corporate instability.”
The court also declined to dismiss a claim against the minority stockholders for aiding and abetting the director’s breach of fiduciary duty. The sole argument made by defendants with respect to that claim was the failure to allege an underlying breach of fiduciary duty. As discussed above, the court held that a breach of fiduciary duty claim had been pled against one director.