Delaware Chancery Court Denies Motion to Dismiss and Permits Discovery into 22.1% Minority Stockholder’s Controller Status

A challenge to a transaction between a Delaware corporation and its controlling stockholder generally will be subject to the highest level of judicial review—“entire fairness”.

As a result, a critical factual question often is whether a significant, but minority, stockholder could be viewed as controlling the corporation.

In a recent decision, the Delaware Court of Chancery concluded that it was reasonably conceivable that Elon Musk, the founder and the owner of 22.1% of the stock of Tesla, Inc., was a controlling stockholder of Tesla and controlled Tesla’s board of directors in connection with its decision to acquire SolarCity Corporation, another company founded by Musk and his cousins and of which Musk owned 21.9% of its stock.  As a result, the transaction could be subject to the heightened entire fairness standard of review notwithstanding that it was approved by the holders of a majority of Tesla’s disinterested shares.

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