The Lost History of Transaction-Specific Control

Abstract

Delaware corporate law has long recognized that stockholders are generally not fiduciaries and do not owe fiduciary duties to the corporation and its other stockholders. Controlling stockholders are the exception and owe fiduciary duties only in limited circumstances. Historically, stockholders are deemed controlling if they either own majority voting power or near-majority voting power and exercise control over the business affairs of the corporation. Over the years, however, decisions by Delaware courts have deemphasized the importance of stock ownership and placed greater focus on other indicia of influence, thereby ascribing control to stockholders with increasingly smaller voting stakes. This approach is contrary to the policy reasons for extending control to stockholders and has prompted uncertainty in Delaware law. 

This Article illuminates another modern twist in the de facto controlling stockholder doctrine: the creation of "transaction-specific control" as an alternative pathway to pleading controller status. As we demonstrate, this doctrinal extension began with a series of brief statements in Delaware Court of Chancery decisions from the early 2000s, without discussion of its novelty or merits. These decisions cited to the canonical opinion of Kahn v. Lynch. But Lynch did not in fact hold that a stockholder takes on fiduciary duties if it "controls" a specific transaction rather than the business affairs of the corporation. Subsequently, these Court of Chancery cases were cited in yet others, creating a chain of case law embedding the notion of transaction-specific control into doctrine. After tracing this evolution, we consider the unintended and negative consequences that result. We argue that Delaware corporate law should jettison the concept of transactional control as a distinct concept and reaffirm that a de facto controlling stockholder is one who both has consequential stock ownership and exercises general control over corporate conduct.

Keywords: Corporations, corporate law, corporate governance, fiduciary duties, controlled companies, controller, controlling shareholders, controlling stockholders, transaction-specific control, transactional control, contextual control, de facto control, minority control

JEL Classification: G30, G34, K22, K41