Wondering About “Control”? The General Assembly Already Defined It.

People have been talking about “control” for decades, and particularly since MFW and Corwin made “control” a bigger deal. When someone asks me about “control,” I have good news. The General Assembly already defined it.[1]

That definition appears in Section 203 of the DGCL, and it has two parts. First, there is a general test: “[T]he possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract or otherwise.”[2]

Second, there is a presumption based on stock ownership: “A person who is the owner of 20% or more of the outstanding voting stock of any corporation … shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary….”[3]

The General Assembly adopted Section 203 in 1988 to constrain related-party transactions with an “interested stockholder.”[4] Interestingly (no pun intended), the General Assembly defined the term “interested stockholder” using an ownership threshold of 15%, suggesting a legislative determination that legitimate concern about the potentially destabilizing influence of significant block ownership starts at that level.[5] Prevailing pill triggers suggest a consensus on that point.

The related-party transactions that Section 203 covers do not stop at squeeze-outs. They encompass direct or indirect increases in equity ownership, transactions conferring financial benefits, and other conflict transactions.[6]

Equity imposes fiduciary duties on a person who controls a corporation to guard against abuses of power, including interested transactions where the controller extracts a non-ratable benefit on unfair terms. Given that similarity of purpose, the Section 203 definition offers a good place for equity to start.

The Section 203 definition has several noteworthy aspects. First, the general definition does not require stock ownership. Like definitions of control used in the federal securities laws and under other statutory schemes,[7] it contemplates control “whether through the ownership of voting stock, by contract or otherwise.” Under this definition, what matters is control, not stockholder status. Yes, in the early cases, control flowed from stockholder-level rights, and often it still does. But the switch toggles on control, not stock.[8]

That insight in turn suggests that the phrase our cases regularly use—“controlling stockholder”—is unwittingly misleading. By making "controlling" the adjective and "stockholder" the noun, it makes "stockholder" seem like the critical concept. Instead, as Section 203 shows, "controlling" is the critical concept. With that in mind, a better framing might be “stockholder controller.” The issue is control. If the person happens to be a "stockholder controller," so be it.

Second, the Section 203 definition does not focus narrowly on board control. Some advocate for that approach, which threatens to reduce the control test to the same head-counting exercise Delaware uses for determining whether a majority of the board is non-independent. Under Section 203, what matters is “the power to direct or cause the direction of the management and policies of a person.” That can exist “by contact, or otherwise.” Get yourself into a position where you can cut off a start-up corporation’s funding and you have control. VC funds know that, which is why they used staged funding as a control mechanism.[9]

Third, when examining stock ownership as one possible contributor to control, Section 203 establishes a rebuttable presumption of control at 20% ownership. At that level, the voting power math tilts heavily in favor of the blockholder. Assuming a typical 80% turnout at a stockholder meeting, the blockholder only needs another 35% of the unaffiliated shares to win. Anyone opposing the blockholder must capture 68% of the unaffiliated vote. The Delaware Court of Chancery has described disinterested majorities of 60% and 66 2/3% as “more commonly associated with sham elections in dictatorships than contested elections in genuine republics.”[10] The record in Air Products showed that no insurgent had ever achieved a 67% vote and that polling votes at this level was not realistically attainable.[11] A 20% stake matters a lot.

The Section 203 standard also comports with longstanding common law authorities. Except for a decade of intermittent tightening from 2006 to 2016,[12] Court of Chancery decisions are consistent with presuming control at around 20%[13] or perhaps slightly higher, say 25%.[14]

Section 203 is a statutory standard. It need not govern in equity. Traditionally, however, equity has been more flexible than statutory schemes and more concerned with the reality of power and its abuses, whatever their form.[15] Think Schnell.

If used to ground a common law approach, Section 203's presumption of control at 20% of voting power would give transactional planners clear guidance about when entire fairness could kick in and when to take steps to prepare for it. It would enable the Court of Chancery to resolve motions to dismiss more efficiently, because unless there were structural limitations on the presumptive controller’s ability to exercise its rights, an argument at the motion to dismiss stage that a blockholder who owned 20% or more lacked control could be readily rejected.

In my personal view, we should embrace the policy determinations that the General Assembly made in 1988. Unlike many DGCL amendments, Section 203 and its definitions were the subject of extensive legislative debate. The General Assembly adopted the control definition, and ithas been part of the DGCL ever since. It represents a stable and longstanding test.

The next time someone asks you about control, think about mentioning Section 203. I find people often haven’t considered it. If nothing else, it might give you something new to talk about.

[1] I offer these comments in my personal capacity. Canon 4 of the Delaware Judges’ Code of Judicial Conduct permits a judge to engage in “activities to improve the law, the legal system, and the administration of justice.” That canon says that “[a] judge may speak, write, lecture, teach, and participate in other activities concerning the law, the legal system, and the administration of justice (including projects directed to the drafting of legislation).” By writing this post, I am attempting to “write” on an issue concerning “the law, the legal system, and the administration of justice.” If seeing that writing take the form of a LinkedIn post makes you queasy, imagine that I am on a panel at a continuing legal education seminar and that the moderator has just asked me if I have any thoughts to share on control. Read the post out loud, and pretend you are hearing me speak into a microphone. 

[2] 8 Del. C. § 203(c)(4).

[3] Id.

[4] Id. § 203(a).

[5] Id. § 203(a).

[6] See id. § 203(c)(3) (defining “business combination”).

[7] See 17 C.F.R. § 230.405; 17 C.F.R. § 240.12b-2.

[8] Consistent with that definition, the Court of Chancery has held that stock ownership is not essential for control. In re Pattern Energy Grp. Inc. S’holders Litig., 2021 WL 1812674 (Del. Ch. May 6, 2021). But see In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980 (Del. Ch. 2014) (implying significant stock ownership is essential for control and discounting importance of management agreement), aff'd sub nom. Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015).

[9] E.g., Ronald J. Gilson, Engineering a Venture Capital Market: Lessons from the American Experience, 55 Stan. L. Rev. 1067, 1082 (2003) (“[S]tagged financing allocates an important periodic lever of control to the venture capital fund. By reserving to itself the decision of whether to fund the portfolio company's next milestone, the venture capital fund takes control over the continuation decision. This power, in turn, gives the venture capital fund the incentive to make the investment in monitoring necessary to evaluate the portfolio company's overall performance over the initial funding period. In the absence of the power to act in response to what it discovers, the venture capital fund would have no reason to expend time and resources in the kind of monitoring necessary to balance the intense incentives created to align the two parties' interests.”).

[10] Chesapeake Corp. v. Shore, 771 A.2d 293, 342 (Del. Ch. 2000).

[11] Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48, 117 (Del. Ch. 2011).

[12] One catalyst for the tightening seems to have been a decision that characterized a 33.5% stake, without explanation, as “relatively low. In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at 10 (Del. Ch. Aug. 18, 2006). Some decisions have echoed PNB by describing similar stakes as “not impressive.” In re Rouse Props., Inc., 2018 WL 1226015, at 18 (Del. Ch. Mar. 9, 2018); accord In re GGP, Inc. S’holder Litig., 2021 WL 2102326, at 20 (Del. Ch. May 25, 2021), aff’d in part, rev’d in part and remanded, 282 A.3d 37 (Del. 2022). The math says otherwise. Another catalyst seems to be an erroneous assertion that a finding of control at 35% was “perhaps” the Court of Chancery’s “most aggressive finding that a minority blockholder was a controlling stockholder.” In re Morton's Rest. Grp., Inc. Shareholders Litig., 74 A.3d 656, 664–66 (Del. Ch. 2013) (discussing In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 553 (Del. Ch. 2003)). That was an exaggeration in 2013, because the Court of Chancery had found control at lower levels. See In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at 10 (Del. Ch. Oct. 24, 2014) (collecting precedents). It is even less accurate today.

[13] For a summary of earlier decisions, see Robbins & Co. v. A.C. Israel Enters., Inc., 1985 WL 149627 (Del. Ch. Oct. 2, 1985) (recognizing that “[t]his Court and others have recognized that substantial minority interests ranging from 20% to 40% often provide the holder with working control” and collecting authorities). For an example, see Rosenthal v. Burry Biscuit Corp., 60 A.2d 106, 107 (Del. Ch. 1948) (Seitz., V.C.) (treating 10% holder who was also CEO and director as controller). The Supreme Court of the United States helped shape understandings of control by holding that DuPont gained controlling influence over General Motors by acquiring a 23% stake, which later led to antitrust violations. See United States v. E.I. duPont de Nemours & Co. 353 U.S. 586 (1957).

[14] Statutory and common law authorities support a presumption of control at that level. E.g., 28 U.S.C. § 1841(a)(2); Am. L. Inst., Principles of Corporate Governance § 1.08 (1994).

[15] E.g., S. Pac. Co. v. Bogert, 250 U.S. 483, 491-92 (1919); Keenan v. Eshleman, 2 A.2d 904, 908 (Del. 1938).