It is well-settled Delaware law that a stockholder is deemed to be a controller when it owns more than 50 percent of the corporation’s stock or it owns less than 50 percent of the corporation’s stock, but nevertheless exercises actual control over the corporation or the challenged decision. A recent opinion by the Delaware Court of Chancery, Basho Technologies Holdco B  v. Georgetown Basho Investors, C.A. No. 11802-VCL, provides valuable guidance on the circumstances under which a minority stockholder, such as a venture capital (VC) firm, may be deemed to be a controlling stockholder such that it owes fiduciary duties to the corporation in which it has invested.

Though the opinion thoroughly reviews a variety of factors that could potentially influence such an analysis, the upshot of the court’s guidance is that, if a VC firm exercises control over the corporation to secure benefits for itself at the expense of the corporation and its other stockholders, the VC firm is at risk of being deemed a controller and to have breached the fiduciary duties that arise as a result of controller status.

The Court’s Factual Findings