USA Law and Practice Contributed by: Kai Liekefett, Derek Zaba, Ram Sachs and Evan Grosch, Sidley Austin
the status quo” (Id). The court held that “if the major- ity stockholder seeks to change the status quo, then the majority controller cannot harm the corporation knowingly or through grossly negligent action” (Id). At the same time, though, the court held that “when exercising stockholder-level voting power, a controller owes a duty of good faith that demands the controller not harm the corporation or its minority stockhold- ers intentionally” (Id). The duties and liabilities of con- trollers ultimately require a facts-and-circumstances assessment within the existing legal framework. The Delaware Supreme Court recently clarified the test to determine whether a minority stockholder is a controlling stockholder. To have control generally, the stockholder must have “potent voting power and management control” and to have transaction-specif- ic control, the stockholder must have exercised actual control during the course of the transaction ( In re Ora- cle Corporation Derivative Litigation ). Additionally, the Delaware General Assembly recently amended DGCL § 144 to provide a definition of a “controlling stockholder”. The contours of this amend- ment remain subject to litigation and have created dif- ferences of opinion among commentators. Generally, a controlling stockholder of a company under Dela- ware law either: • owns or controls a majority in voting power entitled to vote in the election of directors; • has the right to cause the election of nominees selected at their discretion and who constitute a majority of the board; or • owns or controls at least one-third of the voting power entitled to vote in the election of directors and has the power to exercise control over man- agement of the corporation. Delaware also amended § 144 to create safe harbours and specify cleansing mechanisms for conflicted transactions involving controlling stockholders and control groups. Under the amendment, a controlling stockholder or a control group may be cleansed if the conflicted trans- action is approved by either:
• an informed majority of disinterested directors serving on the board or special committee of at least two disinterested directors; or • informed and disinterested stockholders. If such procedures are not in place, the conflicted transaction must generally meet the entirely fairness standard. 9. Insolvency 9.1 Rights of Shareholders If the Company Is Insolvent As a threshold matter, “insolvency” has different meanings in different contexts, and broadly speak- ing, shareholder recoveries and rights may depend on whether a company is insolvent under the: • balance sheet insolvency test, in which the sum of debts is greater than the “fair value” of assets; or • an equity or cash flow insolvency test, in which companies are unable to pay debts as they become due in the ordinary course (note that there are further breakdowns between these categories of insolvency, such as how fair value is measured, and whether the inability to pay debts as they become due is measured by actual failure to pay or by an anticipated inability to pay). The result is that a company can be technically insol- vent but nonetheless hold long-term value for share- holders, particularly where said company is balance- sheet solvent but cash-flow insolvent. Therefore, shareholders can and should stay apprised and cog- nisant of how insolvency is being measured, particu- larly when a company enters into Chapter 11 proceed- ings or other in-court processes, and should consult with restructuring or bankruptcy counsel relatively early in the process. Once a company has entered into insolvency pro- ceedings, such as Chapter 11 cases, if there is a path to long-term value, shareholders may find it advanta- geous to organise an equity committee to specifically pursue the equity’s interests. The key consideration here is cost: absent being designated an “official equi- ty committee” by the bankruptcy court – which is, as
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