Delaware Supreme Court Reaffirms High Bar for Proving Control by a Minority Stockholder

The Delaware Supreme Court affirmed on January 21, 2025, the 2023 decision by Vice Chancellor Glasscock in In re Oracle Corporation Derivative Litigation, in which the Vice Chancellor found, among other things, that Oracle founder Larry Ellison did not control Oracle in its acquisition of NetSuite due to the existence and proper operation of a fully empowered special committee of independent directors.¹ Through its affirmance, the Delaware Supreme Court provides important guidance on when a stockholder holding less than a majority of voting power of a company could be deemed a controller. In so doing, the Supreme Court reaffirms the high bar that must be cleared to plead and prove control by a minority stockholder.

More important, the Supreme Court’s decision signals that the full suite of MFW-procedures may not be necessary to restore the business judgment rule for an interested transaction with a potential controller who does not possess majority voting power. This result, if further developed, could provide certainty for boards considering any transaction in which an influential, minority stockholder has an interest, while reaffirming the deference Delaware courts have historically given to independent, disinterested directors.²

Background

We previously wrote about the Court of Chancery’s post-trial opinion finding that Mr. Ellison (Oracle’s founder, 28.4% stockholder, Executive Chairman of its board of directors, and former CEO and current Chief Technology Officer) did not exercise control over Oracle with respect to its acquisition of NetSuite.³ As the Supreme Court noted, the Court of Chancery found that Ellison did not exercise control over Oracle’s acquisition of NetSuite because:

• “the Oracle board and management were not afraid to disagree with Ellison”;
• “Ellison neither controlled Oracle’s day-to-day functions nor dictated Oracle’s operations to the Oracle board”;
• “Ellison ‘scrupulously avoided’ discussing the transaction with the Special Committee”;
• “Ellison neither proposed the transaction nor indirectly controlled the merger negotiations through the January 27, 2016, phone call with [the target company’s co-founder and Chairman]”; and,
• “although Ellison could have controlled the transaction, he did not interfere with or actually exercise control over the transaction.”⁴

On appeal, plaintiffs did not challenge these factual findings by the Court of Chancery. Instead, plaintiffs challenged the ultimate finding of lack of control.⁵ Affirming the Court of Chancery, the Supreme Court rejected plaintiffs’ arguments.

The Supreme Court’s Decision

In its decision, the Delaware Supreme Court provides important guidance on the different types of control, and the implications when a plaintiff seeks to plead and prove control by a minority stockholder.

First, the Supreme Court differentiated the potential control by a minority stockholder from the “hard control” possessed by a majority stockholder.  Specifically, “because a majority stockholder controls the levers of power within the corporation”, a majority stockholder has hard control and as a result “assumes fiduciary duties in certain circumstances.”⁶ Accordingly, when a hard controller stands on “both sides of a transaction and receives a non-ratable benefit,” he or she “bears the burden of demonstrating the most scrupulous inherent fairness of the bargain.”⁷

Second, the Supreme Court clarified that “a stockholder who owns or controls less than 50% of a corporation’s voting power is not presumed to be a controlling stockholder with fiduciary duties.”⁸ The Supreme Court’s clarification that control “is not presumed” for a minority stockholder is significant for its contrast with recent commentary from certain members of the Court of Chancery suggesting that a stockholder holding as little as twenty percent of the company’s voting power could be presumed to have control.⁹

Third, the Supreme Court emphasized that the test for proving “control by a minority stockholder is not an easy one to satisfy.”¹⁰ To have control, “the minority stockholder must have a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.”¹¹ And to prove transaction-specific control, a plaintiff must prove the alleged controller “exercised actual control over the board of directors during the course of a particular transaction.”¹² Citing the factual findings by the Court of Chancery noted above, the Supreme Court held plaintiffs failed to show control by Ellison.

The Supreme Court’s affirmance that the Special Committee’s process negated a finding of control could prove significant because that finding resulted in the application of the business judgment rule. By contrast, a special committee, by itself, is not sufficient to restore the business judgment rule for an interested transaction with a hard controller.¹³ To restore the business judgment rule when a hard controller stands on both sides and receives a non-ratable benefit through a transaction, the transaction must be pre-conditioned on the dual protections of MFW—i.e., approval by both a special committee of independent directors and a majority of the minority stockholders.¹⁴ And yet, Oracle indicates that a special committee alone could negate a finding of control by an influential minority stockholder and restore the business judgment rule. If the holding in Oracle is expanded to other interested transactions involving a significant minority stockholder that are subject to the approval by a special committee, and without each of the factual findings noted above, then directors and acquirors could expect a reduction in litigation risk and an increase in deal certainty by not having to follow in exacting detail each of the requirements of MFW.

Last, the Supreme Court offers a cautionary note. Specifically, the Supreme Court warns that a “controlling stockholder question is not a license to sue on every transaction involving a corporation with a founder/visionary leader.”¹⁵ But the Court adds that “when a determination of whether control exists turns on disputed facts, it is impossible to determine whether a large block holder is a controlling stockholder until an evidentiary hearing is held.”¹⁶ The application of the Supreme Court’s decision in Oracle at the pleading stage in future cases involving allegations of control by a minority stockholder remains to be seen.

Takeaways

The Supreme Court’s decision in Oracle could prove crucial in addressing concerns from the market about the expansion of judicial review of transactions involving potential controllers. Because these concerns have been a driving force in the debate over Delaware’s continued status as the preferred domicile for incorporation, the continued development of the holding in Oracle could lead to a significant reduction of litigation risk and increased predictability for boards of directors and large stockholders as to their fiduciary obligations. Accordingly, boards of directors, significant stockholders and practitioners will need to monitor for further developments, including:

• Whether each of the factors cited by the Supreme Court and Court of Chancery for the absence of control in Oracle are necessary to preclude a finding of control by a minority stockholder;
• Whether a fully empowered special committee will suffice for restoring the business judgment rule for a transaction in a which a minority stockholder (and potential controller) has a non-ratable interest, so long as the stockholder does not dominate the committee’s process;
• How the lack of presumption of control by a minority stockholder will bear out at the motion to dismiss stage given Delaware’s plaintiff-friendly “reasonable conceivability” pleading standard, or if a more rigorous pleading standard will be needed to review allegations of control in order to avoid a “license to sue”; and,
• Whether the Oracle decision will lead to the exacting requirements of MFW being limited to the hard controller context, and where we anticipate that issue could be developed further in the pending appeal over the Court of Chancery’s 2024 decision rescinding Elon Musk’s compensation package in Tornetta v. Musk.