Former Delaware Chancellor Discusses Controlling Shareholders

Former Delaware Chancellor William Allen has delivered an interesting assessment of controlling shareholders and the sale of control at a recent corporate governance seminar.

Broadly, the well-respected former jurist said that the US legal system contains an array of imperfect protections against abuse, which do allow the economy to gain the efficiency benefits that controlling shareholders can produce. Generally, judicial remedies and an active class action bar are effective in limiting the amount of exploitation by controlling shareholders. While the system is not perfect, in his view it works well as an ex ante system to constrain abuses in controlling shareholder transactions; but ex post as a remedy it works less well because the courts are poor at determining fair value. Mr. Allen is currently the Nusbaum Professor of Law and Business at NYU, and of counsel at Wachtell, Lipton, Rosen & Katz.

He pointed out that fiduciary duty of loyalty applies to all persons who exercise actual control. The duty requires that any interested transaction be on intrinsically fair terms, meaning fair price and fair process. He noted that courts tend to be active in demanding fairness and the controlling shareholder has the burden of proof.

He advised boards to hire capable and independent advisors to advise on law and price. Courts will be skeptical and look at the relationship between the advisors and the controlling shareholder, he emphasized, and will be very skeptical about advisor contingency fees. He also believes that the company’s general counsel be kept away from this process. Finally, he noted that the general rule is that controlling shareholders can transfer control by selling their shares and owe no duty to other shareholders to share any premium their control block may command on the market.