September 3, 2018Articles

Delaware Court of Chancery Rejects Novel "Control Group" Theory

ABA Business Law Today, Month-In-Brief: Business Litigation & Dispute Resolution

In Almond for Almond Family 2001 Tr. v. Glenhill Advisors LLC, C.A. No. 10477-CB (Del. Ch. Aug. 17, 2018), Chancellor Bouchard rejected an attempt to broaden the conception of a “control group” under Delaware corporation law for purposes of determining whether a breach of fiduciary duty claim is dually direct and derivative.  The plaintiffs had stipulated that a certain defendant (“Glenhill”) was a controller, with 92.8% stock ownership in a corporation and control over corporate decision-making.  The plaintiffs then advanced the novel theory that other small minority stockholders whose interests were aligned with Glenhill’s formed, together with Glenhill, a control group.  Chancellor Bouchard contrasted this theory with accepted “control group” theories under Delaware law and stated that the analysis for determining the existence of a control group does not apply “to glom onto a preexisting controlling stockholder additional stockholders to give them the status of a ‘control group’ . . . .”  Mem. Op. at 63.  Rather, “in order for a preexisting controlling stockholder to become part of a ‘control group’ with the other stockholders, the preexisting controlling stockholder would have to agree to share with the other stockholders, or to impose limitations on, its own control power . . . for some perceived advantage as part of a legally significant relationship with the other stockholders.”  Mem. Op. at 64.  Plaintiffs provided no evidence of such an arrangement, and thus had not shown the existence of a control group.  This conclusion ultimately led the Court to enter judgment in the defendants’ favor on the plaintiffs’ claims based on the “control group” theory.  In doing so, the Court narrowly construed what constitutes a dually direct and derivative claim (see Mem. Op. at 57-60), consistent with the Delaware Supreme Court’s decision in El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248 (Del. 2016).