To determine the applicable standard of review in a stockholder challenge to a corporate transaction, a plaintiff may rebut the business judgment rule by pleading facts that support a reasonable inference that “a controlling stockholder stands on both sides of a transaction, or at least half of the directors who approved the transaction were not disinterested or independent.” If the business judgment rule is rebutted, the most rigorous standard of review, entire fairness, which examines fair dealing and fair price in a transaction, is applicable. A stockholder is deemed a “controlling stockholder,” owing fiduciary duties to other stockholders, “if it owns a majority interest in [the corporation] or exercised actual control over the board at the time of the transaction.”

In a recent decision, Calesa Associates v. American Capital, C.A. No. 10557-VCG (Del. Ch. Feb. 29, 2016), the Delaware Court of Chancery held that the plaintiff stockholders of Halt Medical Inc. had pleaded sufficient facts to support a reasonable inference that the private equity defendant, American Capital, which owed the largest, but not a majority, equity interest in Halt, was nevertheless its controlling stockholder in a financing transaction between Halt and the alleged controlling stockholder that diluted the interests of other stockholders. The court found that, while not a majority stockholder, American Capital exercised “actual control” over the Halt board’s decision in the financing transaction because a majority of the board was beholden to, or not independent from, American Capital. Accordingly, the court concluded that the complaint stated a claim that American Capital was a controlling stockholder, standing on both sides of the financing transaction, which triggered the entire fairness standard of review to the plaintiff stockholders’ fiduciary-duty claims against American Capital and the Halt board.


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