Following the close of discovery, Musk filed a motion for summary judgment. In his motion, Musk asserted that even if he was a controlling stockholder at the time of the challenged transaction, the plaintiffs failed to offer evidence that Musk actually coerced the minority stockholders into approving the merger.⁹ Without any evidence indicating actual coercion, Musk argued, the challenged transaction should be subject to the board of directors’ business judgment.¹⁰ The plaintiffs, on the other hand, asserted that no actual evidence of coercion is required for the presumption that a conflicted controller improperly influenced the minority vote.¹¹

The court explained the necessary inquiry when analyzing conflicted transactions with controlling stockholders revolves around the “ability to dominate the corporate decision-making process.”¹² At bottom, the court explained, “the ability to control, rather than the actual exercise of control, is the determinative factor in [Delaware’s] controlling stockholder jurisprudence.”¹³ The reasoning for this “ability” analysis is because “[e]ven when no coercion is intended, shareholders voting on a parent-subsidiary merger might perceive that their disapproval could risk retaliation of some kind by the controlling stockholder,” and thus the coercion is inherent in the transaction.¹⁴

The court also explained the theory of inherent coercion has been criticized, including by some former members of the Delaware Court of Chancery and Delaware Supreme Court. Those former jurists – including former Vice Chancellor (later Justice) Jack B. Jacobs, who first articulated the doctrine of inherent coercion – have stated that “experience has shown that th[e] concern (inherent coercion) is too insubstantial to justify a review standard that requires judges to second-guess a business transaction that rational investors have approved.”¹⁵

In its opinion, the court went as far as “acknowledg[ing] that [Musk has] raised a provocative argument” and commended Musk for his “ingenuity.”¹⁶ The court recognized that perhaps Musk’s theory may be correct given the “scholarly advocacy for doctrinal change that inherent coercion is a presumption” under Delaware law.¹⁷ Nevertheless, the Court of Chancery, being bound by Delaware Supreme Court precedent, rejected Musk’s argument that business judgment should be applied when there is no actual evidence of coercion, and in doing so, denied summary judgment.¹⁸ Thus, at least at the present time, no evidence of actual coercion is required under Delaware law to support the presumption of inherent coercion by a controlling stockholder for an interested transaction in either the pre-trial or trial stage.¹⁹

Takeaway

When controlling stockholders (either by majority of voting control or a combination of voting power and management control) are involved in a conflicted transaction, the entire fairness standard of review will apply at both the pre-trial and trial stage, even when no actual evidence of coercion exists to support the plaintiff’s claim.

1. In re Tesla Motors, Inc. S’holder Litig., 2020 WL 553902, at *6 (Del. Ch. Feb. 4, 2020).
2. Thus, a minority stockholder can be deemed a “controlling stockholder” without owning a majority of the company’s voting power. See, e.g., In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 993 (Del. Ch. 2014) (“When a stockholder owns less than 50% of the corporation’s outstanding stock, a plaintiff must allege domination by a minority shareholder through actual control of corporate conduct.”).  
3. In re Tesla Motors, Inc. S’holder Litig., 2020 WL 553902, at *6.
4. Id. at *1.  
5. Id.  
6. See In re Tesla Motors, Inc. S’holder Litig., 2018 WL 156293, at *10 (Del. Ch. Mar. 28, 2018).  
7. Id. at *12.  
8. Id.  
9. See In re Tesla Motors, Inc. S’holder Litig., 2020 WL 553902, at *4. 
10. Id. In fact, the plaintiffs “acknowledge[d] that they ha[d] not attempted to develop that evidence [of actual coercion] in discovery.”  
11. Id.  
12. Id. (quoting Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006)).  
13. Id. at *5 (emphasis in original).  
14. Id.  
15. See In re Tesla Motors, Inc. S’holder Litig., 2020 WL 553902, at *6. (quoting William T. Allen, Jack B. Jacobs and Leo E. Strine, Jr., Function Over Form: A Reassessment of Standards of Review in Delaware Corporate Law, 56 Bus. L. 1287, 1308-09 (2011)); see also In re Cox Commc’ns, Inc. S’Holders Litig., 879 A.2d 604, 647 (Del. Ch. 2005) (“By now, experience has proven that special committees and independent board majorities are willing to say no to controllers.”).  
16. Id. at *2.  
17. Id. at *6.
18. Id. 
19. Id. (“[S]hareholders are entitled to an independent review where the controller is made to explain why the transaction’s process and price were fair.”).