When is a controller a controller?

A recent opinion in the Chancery Court, In re Crimson Exploration, deals with the question of when is a stockholder a controlling stockholder. This case deals with an application of the proper standard of review in a transaction with an alleged controller.  When does one become a controlling shareholder sufficient to overcome pleading requirements? In this case one investor, Oaktree, controlled 33.7% of Crimson's stock.  

If Oaktree were a controller, then entire fairness would be the standard of review if plaintiffs had demonstrated that the challenged merger fell into one of two categories: "(a) transactions where the controller stands on both sides; and (b) transactions where the controller competes with the common [non-controlling] stockholders for consideration."

While being a majority holder is typically sufficient to establish that one a controlling shareholder, one may be a controller with less than a majority. In such circumstances "a plaintiff would have to allege facts to show that the blockholder actually controlled the board's decision about the transaction at issue." The court in Crimson provides a non-exhaustive list of cases (below) where the question at issue was whether a non-majority stockholder was in fact a controller.

 

After examining the pleading the court held that plaintiffs had not pleaded sufficient facts to establish that the 33.7% blockholder actually controlled the board's decisions with respect to the challenged merger.  Without a controller, the challenged transaction received the presumption of business judgment. 

-bjmq