How to Evaluate Non-Majority Control: What History and Statutes Tell Us

Under American law, a person who controls a corporation is a fiduciary. Since the nineteenth century, American law has treated a person who wields a majority of the voting power as having control. For almost as long, American law has recognized that holding a majority of the voting power is sufficient but not necessary for control. During the past two decades in Delaware, two schools of thought co-existed regarding non-majority control.

One school took a formal approach that (i) shifted from examining control over the business affairs of the enterprise to control over the board, (ii) discounted sources of influence other than stock ownership, and (iii) elevated the threshold at which voting power would become significant. Decisions applying those principles dismissed cases frequently at the pleading stage after concluding it was not reasonably conceivable that a non-majority stockholder could exercise control. Another school persisted in applying a functional approach that (i) continued to examine control over the business affairs of the enterprise, (ii) considered multiple sources of influence when evaluating control, and (iii) recognized that lower levels of voting power could support control. Decisions applying those principles dismissed cases less frequently at the pleading stage.

After a group of influential commentators attacked the functional approach as novel and anomalous, the Delaware legislature amended the Delaware General Corporation Law to define the term “controlling stockholder” in formal terms. This Article and a companion piece explore the claims of the two schools. This Article examines the approaches that courts have historically taken when evaluating non-majority control. The companion piece looks to statutory definitions of control.