Fiduciary Duties of Controller Exercising Stockholder-Level Powers to Block Board Action
In re Sears Hometown and Outlet Stores Stockholder Litigation (Jan. 24, 2024), the Delaware Court of Chancery, in an important, post-trial opinion, for the first time clearly set forth the fiduciary duties and standard of review applicable when a controller uses its stockholder-level voting power to block action that the company’s board of directors has determined to […]
Gail Weinstein is Senior Counsel, and Philip Richter and Steven Steinman are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Steinman, Steven Epstein, Randi Lally and Mark Lucas and is part of the Delaware Law series; links to other posts in the series are available here.
In re Sears Hometown and Outlet Stores Stockholder Litigation (Jan. 24, 2024), the Delaware Court of Chancery, in an important, post-trial opinion, for the first time clearly set forth the fiduciary duties and standard of review applicable when a controller uses its stockholder-level voting power to block action that the company’s board of directors has determined to be in the company’s best interest.
The court held that Eddie Lampert, the controller of Sears Hometown and Outlet Stores, Inc. (the “Company”), had fiduciary duties, albeit of a “limited” nature, when he acted by written consent to amend the Company’s bylaws and remove two directors (the “Controller Intervention”) in an effort to block a plan, adopted by an independent committee of the board (the “Committee”), to liquidate the company’s non-profitable business segment (“Hometown”) and continue its other, profitable segment (“Outlet”). The court, applying enhanced scrutiny review, found that Lampert had complied with his fiduciary duties.
The court also addressed a transaction (the “End-Stage Transaction”) that the Company negotiated with Lampert after the board became convinced that Lampert would block the liquidation plan and that it would not be sustainable for the Company to continue to operate with both business segments. The End-Stage Transaction involved a sale of the Company to Lampert, eliminating the minority stockholders’ interests (although Outlet was sold to a third party under the go-shop process in the merger agreement). As Lampert was self-interested in the End-Stage Transaction, the standard of review was entire fairness. The court found that Lampert “sincerely believed” that the transaction was fair, but the transaction did not satisfy entire fairness. The court ordered Lampert to pay damages (over $18.3 million) to the minority stockholders. On January 31, 2024, Lampert’s counsel filed a motion for reargument with respect to the End-Stage Transaction, arguing that correction of an alleged error in the court’s valuation analysis should lead to the conclusion that the price fell within the range of reasonableness or at least would result in a substantial decrease in the damages awarded by the court.
In this Briefing, we discuss the court’s controller fiduciary duty analysis relating to Lampert’s Controller Intervention to block the board’s plan to liquidate Hometown; and we offer related Practice Points.
