Chancery Clarifies Controlling Stockholder Fiduciary Duties In Sears Litigation – Corporate and Company Law

In re Sears Hometown and Outlet Stores, Inc. S’holder
Litig., C.A. No. 2019-0798-JTL (Del. Ch. Jan. 24,
2024)

Here, a special committee of the board supported a plan to
liquidate the company’s floundering business segment and
continue operating its more promising business segment. The
company’s controlling stockholder opposed the plan and took
action to prevent its implementation. He first adopted a bylaw that
created hurdles to the plan’s approval. He then replaced two of
the three directors serving on the special committee who most
favored the plan. He ultimately agreed to acquire the minority
stockholders’ interests in a squeeze-out transaction negotiated
with the remaining special committee member.

In the resulting fiduciary duty litigation against the
controller, the Court of Chancery most notably clarified the
fiduciary duties of controlling stockholders when exercising
stockholder-level voting power. The Court reasoned that a
controller’s intervention is not inequitable per se
but should implicate fiduciary duties, albeit duties different than
those of a director. Regarding the appropriate standard of conduct,
the Court held that, when exercising stockholder-level voting
power, a controller owes a duty of good faith to not harm the
corporation or its minority stockholders intentionally, as well as
a duty of care to not harm them through grossly negligent action.
Regarding the appropriate standard of review, the Court held that
enhanced scrutiny was most fitting in a scenario like this one,
where a controller acts to impair the rights of the board or a
stockholder minority.

Applying these standards to the case at bar, the controller
needed to show that he acted in good faith for a legitimate
objective, that he had a reasonable basis for believing that action
was necessary, and that he selected a reasonable means for
achieving his legitimate objective. The Court found the controller
met his burden in this regard and did not breach his fiduciary
duties in intervening and blocking the special committee’s
plan. The controller had a good-faith belief that the plan was
flawed and had acted reasonably in his efforts to avoid the
potentially flawed decision. However, the controller’s ultimate
acquisition of the minority stock following his intervention was a
conflicted transaction and separately needed to satisfy the entire
fairness review. On that point, the controller failed to carry his
burden to prove the acquisition was entirely fair as a matter of
price and process, and the Court found him liable for approximately
$18 million in damages.

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