3/26 Study Notes on Shareholder Control and Fiduciary Duties

There are two types of control for determining a controlling shareholder:
- De Jure Control (Actual Control)
- De Facto Control (Effective Control)

Definition: De jure control refers to a situation wherein a shareholder owns more than 50% of a corporation's voting power.
Voting Power:
- Generally, owning over 50% of a corporation's shares also implies owning over 50% of its voting power.
- This is true for the majority of corporations where each share equals one vote.
Exceptions:
  - Supervoting Shares: Shares that possess greater than one vote.
    - Example: Alphabet (Google) and Meta (Facebook) have founders who retain control with supervoting shares.
  - Zero Voting Shares: Some corporations issue shares that do not confer voting rights.
    - Example: Snap, creator of Snapchat, provides zero vote shares.
Control Mechanism:
  - Holding more than 50% voting power allows the shareholder to:
    - Elect the majority of the board of directors.
    - Decide key corporate actions like mergers, amendments to articles of incorporation, and public offerings.
Collective Majority:
  - Groups of shareholders can function collectively as a controlling entity if they are deemed a control group.
    - Commonly seen in family-owned businesses.
      - Example: The Walton family collectively owns over 50% of Wal-Mart's voting power.

Definition: De facto control exists when a shareholder does not own over 50% of the voting power but has significant influence over corporate decision-making.
Key Characteristics:
- The shareholder is often able to dominate the corporate decision-making process through influence on the board rather than outright ownership.
Factors Determining De Facto Control:
  - Board Influence: Exerting influence over a majority of the board members who are not independent from the controlling shareholder.
  - Shareholder Roles: Presence of influential roles within the company (e.g., CEO, CFO).
  - Stock Ownership: Significant ownership stake, even if under 50%, can signal influence.
    - In public companies, ownership of 20-30% is substantial as the largest stakeholder might only be 1% or less.
  - Relationships with Directors: Personal, familial, or financial ties with board members can enhance influence.
  - Contractual Power: Voting agreements or contracts that give shareholders certain veto rights (common with venture capitalists in private companies).

Both forms of control trigger fiduciary duties under the law due to the heightened potential for exploitation of minority shareholders.
This includes concerns of fiduciary duties such as the duty of care and loyalty.

Tesla’s Acquisition of SolarCity:
  - Elon Musk, as a significant shareholder, faced allegations of self-dealing by influencing the board for the mutual benefit of both companies, presenting a case for assessing de facto control.
  - Musk's involvement and influence were assessed against several factors indicating whether he was a de facto controlling shareholder:
    - His voting power was notable at 22%.
    - Influence over the board due to personal ties and public persona.
    - Other board members’ financial interests became conflictual, lacking independence.
  - The court ruled that he had de facto control based on analysis of these factors.

It entails special fiduciary duties, distinct from non-controlling shareholders.
Key Considerations:
  - Cash-Out Transactions:
    - Controlling shareholders may engage in cash-out transactions aiming to eliminate minority shareholders.
    - The law scrutinizes these for fairness, fearing that minority shareholders may be forced out at unfavorable prices.
    - Delaware courts employ the entire fairness test, which examines both fair dealing and fair price to ensure protections.
  - Sales of Control:
    - A sale of control involves a controlling shareholder selling their stake to a new party.
    - Concerns arise primarily over control premiums where the selling shares may generate higher-than-market prices.
    - The law is particularly concerned with sales to corporate looters or parties intending to harm minority shareholders.

Fiduciary duties vary by context but common themes arise from the law's concerns over minority shareholder exploitation.
The two scenarios of concern leading to special duties are:
1. Cash-Out Transactions: Which potentially unfairly diminish the minority's economic value.
2. Sales of Control: Where a premium may accompany the sale, purportedly valuing greater governance rights.

Understanding controlling shareholders' definitions and implications is critical for grasping corporate governance laws and fiduciary duties in a corporate context. The nuances between de jure and de facto control shape how corporate power dynamics manifest legally and ethically.