Restating the Law of Conflicted Controller Transactions: Part 2A

The Restatement Approach to Defining Controller

This was supposed to be the second in a planned series of five posts dealing with the rapidly evolving law governing conflicted controller transactions. In this post, I planned to discuss the approach proposed in Tentative Draft No. 1 of the Restatement of the Law of Corporate Governance. The post got pretty long, however, so I split it into two pieces. In this part, I discuss the Restatement’s definition of controller.

The Draft defines “controller” to mean “a person or a group of persons that, directly or indirectly: (a) Owns voting securities of the corporation entitling the holder to cast more than 50 percent of the votes in the election of the directors of the corporation; or (b) Otherwise exercises a controlling influence over the business and affairs of the corporation.” Restatement of the Law, Corporate Governance § 1.10 TD No 1 (2022).

On its face, the definition appears to differ from current law (i.e., pre-SB 21 Delaware law) in an at least one important respect. Specifically, it appears that one could be a controller without owning any voting stock at all. Note the word “otherwise.”

It may be that that is not what the drafters intend. If so, I hope they will accept this post as proposing a friendly amendment that would focus the definition on voting power. If not, I hope they will accept it as a constructive critique.

The commentary to § 1.10 is not crystal clear on this point, but appears to contemplate that stock ownership is not necessary for control to exist. It states, for example, that:

a person must exercise a substantial degree of power over a corporation's internal decisionmaking processes to be considered a controller under the second prong.

Point of personal privilege: I am a firm believer in the rule that compound adjectives take a hyphen and compound nouns do not. Hence, “decisionmaking processes” should read “decision-making processes.” Conversely, “corporate decisionmaking” should read “corporate decision making.” “Decisionmaking” is a neologism of the sort that typifies our modern lax society.