January 20, 2021

Controller’s Receipt of “Non-Ratable Benefit” Mandates Entire Fairness Review

Is a controlling stockholder’s “mere presence” on both sides of a transaction enough to invoke application of the entire fairness standard of review, or is something more required? That’s the question that the Chancery Court recently grappled with in In re Viacom Inc. Stockholders Litigation (Del. Ch.; 12/20). The case arose out of CBS and Viacom’s 2019 merger. The complaint alleged that, among other things, Viacom & CBS’s controlling stockholder, Shari Redstone, exerted her control over Viacom’s board in a manner that caused them to negotiate and approve the merger out of loyalty to her on terms detrimental to Viacom and its public stockholders.

The plaintiffs argued that the mere presence of the controlling stockholder on both sides of the transaction was sufficient to invoke the entire fairness standard of review. In response, the defendants argued that more was required:

For their part, Defendants, and in particular the NAI Parties, accurately quote Sinclair, where, to reiterate, the court held, “[t]he basic situation for the application of the [entire fairness] rule is the one in which the [controller] has received a benefit to the exclusion and at the expense of the [minority].”173 In keeping with this “basic” pronouncement, the NAI Parties maintain that in each instance where a Delaware court has observed that a controller’s presence on both sides of a transaction will trigger entire fairness review, there is always something more that causes the court to conclude that the controller is conflicted.

The defendants went on to note that the plaintiffs “can point to no Delaware case where the court reviewed the controller’s conduct for entire fairness where all the plaintiff had alleged was that the controller stood on both sides of a transaction.”

While acknowledging that the defendants were “right to seize upon nuance,”  Vice Chancellor Slights cited the Delaware Supreme Court’s decision in Emerald Partners, in which the Court stated that a controller’s “stance on both sides as a corporate fiduciary, alone, is sufficient to require the demonstration of entire fairness.”  He observed that Delaware courts generally can be trusted to “say what they mean and mean what they say,” and that the rule in Emerald Partners appeared to leave little room for nuance.

However, the Vice Chancellor did not need to formally resolve the issue of whether a controller’s mere presence was sufficient to invoke entire fairness review. That’s because he found that the plaintiffs had adequately pled that the controlling stockholder had received a “non-ratable benefit” by using the merger “as a means to consolidate her control of Viacom and CBS at the expense of the Viacom minority stockholders.”

This excerpt from a recent Sidley blog summarizes the key takeaways from the Vice Chancellor’s decision:

Although the Court’s discussion of “mere presence” is dicta, it provides important insight that future decisions from the Court of Chancery will find that the mere presence of a controller on both sides of a merger alone is sufficient to trigger entire fairness review in the absence of MFW dual protections (i.e., that the merger is approved by an independent special committee and a majority of the minority stockholders). It also reminds that while a controller who receives the same consideration as others may not trigger the “nonratable” benefit analysis, the receipt of control-related intangible benefits may suffice.

John Jenkins