A Focus on Conflicted Controllers, the "800-Pound Gorillas"--Tornetta and BGC
In the past quarter, two important Court of Chancery decisions--Tornetta and BGC--have highlighted the "reflexive skepticism" with which the Delaware courts approach transactions involving conflicted controllers.
- In Tornetta, a case of first impression according to the court, Vice Chancellor Slights held that unless a board's decision on executive compensation for a controlling stockholderCEO complies with the protections outlined in the seminal MFW decision, the entire fairness standard of review (which is the strictest standard) applies to the court's evaluation of a stockholder challenge to the compensation. The court so decided notwithstanding that, until now, a) business judgment review has applied to compensation decisions made by independent directors and b) MFW-compliance has been required for business judgment review of conflicted controller transactions only in the context of transactions that are "transformational" for the corporation.
- In BGC, Chancellor Bouchard applied what seems to be a more stringent standard than in the past for evaluating whether putatively independent directors can be presumed to be capable of acting independently from a controller in the context of evaluating demand futility. ("Demand futility" means that a stockholder who wishes to bring claims against a controller need not first make a demand on the board--for the board to bring the claims on behalf of the corporation--if doing so would be "futile" because the directors' conflicts or lack of "independence" suggest that they might not be capable of making the decision impartially.) The Chancellor appeared to focus on the sense of owingness that a director could feel toward a controller if the director's general status or positions of importance in the company or the community were a result of his or her connection with the controller.
The court emphasized in these cases the potential for "coercive influence" by controllers--"800-pound gorillas" (in the words of Chief Justice Strine, quoted in Tornetta)---over directors (who the controller typically can remove or not reappoint) and unaffiliated stockholders (who the controller can harm through retributive acts such as a squeeze-out merger or the cutting of dividends). There is "an obvious fear that even putatively independent directors may owe or feel a more-than-wholesome allegiance to the interests of the controller, rather than to the corporation and its public stockholders," the Chief Justice had explained in a previous case. The court reinforced in Tornetta and BGC that this concern is not necessarily eliminated even where the controller has no intention to be coercive, the transaction is negotiated by "outside" directors, and/or the transaction is stockholder-approved.