Can Controlling Shareholders Demand More To Sell Their Shares?

Prof. Larry Ribstein here and Prof. Steve Bainbridge here, discuss whether a controlling shareholder can appropriately demand more to sell their shares. Citing to various Delaware cases (including comments to the post), they discuss the issue in the context of the recently announced deal by Dow Jones, publisher of the Wall Street Journal, to Rupert Murdoch’s News Corp. Kevin O’Keefe refers here to the interesting aspect of the deal that includes the widely read Wall Street Journal Law Blog.  Here  is an excerpt from my short blog summary of the Chancery Court decision of last July, in Abraham v. Emerson Radio Corp., that discussed the duties of a controlling shareholder selling its shares for a premium:

The essence of the argument about why the complaint failed to state a claim, according to the court “is simple: under Delaware law, Emerson [the majority shareholder and seller] was free, as a general matter, to sell its majority bloc in Sports Supply for a premium that was not shared with the other Sport Supply stockholders.”

The complaint failed to allege adequate circumstances to support the suggestion that Emerson knew, suspected or should have suspected that the buyer was either a looter or was dishonest, and had improper plans for Sports Supply. The court was dubious that the common law of corporations would recognize a duty of care-based claim against the controlling stockholder for failing to (in the judgment of the court) examine the bona fides of a buyer, at least when the corporate charter contains an exculpatory provision authorized  expressly by DGCL Section 102(b)(7) [of Title 8 of the Delaware Code.]

 Thus, the court reasoned, when the board itself is exempt from liability for violations of the duty of care, pursuant to the DGCL, by what logic would the judiciary extend liability to a controlling shareholder exercising its ordinarily unfettered right to sell its shares? The court concluded its reasoning in dismissing the claims by observing that, when opposing the basic right of every stockholder to sell its shares: “a plaintiff seeking to support the claim must plead facts that indicate that the controller knew there was a risk that the buyer was a looter or otherwise intended to extract illegal rents from the subsidiary, at the expense of the subsidiary’s remaining stockholders.”