The Delaware Court of Chancery yesterday held, on a question of first impression, that a controlling stockholder must formally ratify a self-dealing transaction by a vote at a meeting of stockholders or by written consent in order to shift the standard of review from entire fairness to the business judgment rule. In Espinoza v. Zuckerberg, et al., C.A. No. 9745-CB (Del. Ch. Oct. 28, 2015), Chancellor Bouchard stated that: “The controlling stockholder of a Delaware corporation wields significant power, including the power in some circumstances to ratify interested directors’ decisions and thereby limit judicial scrutiny of such actions. But a controlling stockholder should not, in my view, be immune from the required formalities that come with such power.” This case involved Mark Zuckerberg, the controlling stockholder of the popular social media site Facebook, Inc.
Supplement: The venerable Professor Bainbridge, a friend of this blog and one of Delaware’s favorite corporate law professors, provides scholarly insight on this case here, as well as kindly linking to this post (and others).
UPDATE: The Court of Chancery recently certified an interlocutory appeal of this case. Ernesto Espinoza v. Mark Zuckerberg, et al. and Facebook, Inc., C.A. No. 9745-CB, order (Del. Ch. Nov. 20, 2015). This information initially came to our attention courtesy of The Chancery Daily, the unparalleled publication that chronicles every nuance and activity of the Court of Chancery. The next step in that process is for the Delaware Supreme Court to make an independent decision about whether they will accept the interlocutory appeal or not.
Supplement II: Frank Reynolds of Thomson Reuters has also penned an article that describes many factual details of the case as well as providing commentary on the pending interlocutory appeal that was initiated on November 20.