Reed Smith Client Alerts

A recent decision by the Delaware Court of Chancery explained that the doctrine of “inherent coercion” by a controlling stockholder survives beyond discovery, and plaintiffs need not identify actual evidence of coercion to counter a defendant’s ratification defense.1 The inherent coercion doctrine provides that interested transactions involving controlling stockholders (namely, stockholders with a majority of voting control or a combination of voting power and management control, such that the stockholder is deemed to have effective control of the board of directors without owning a majority of the company’s stock)2 must be reviewed for entire fairness – even when the transaction was approved by the minority stockholders – because the vote is presumed to be coerced.3

In re Tesla Motors, Inc. S’holder Litig. involved the plaintiffs’ challenge to the acquisition by Tesla, Inc. (Tesla) of SolarCity Corporation (SolarCity).4 SolarCity was partially owned by Tesla’s chairman of the board of directors, CEO, and largest stockholder, Elon Musk (Musk).5 Prior to the acquisition, Tesla’s board of directors sought stockholder approval for the acquisition, and that approval excluded Musk’s vote and the vote of other Tesla stockholders who served as directors and officers of SolarCity.6

Initially, the defendants, including Musk, moved to dismiss the suit, claiming minority stockholder approval made the acquisition subject to Delaware’s business judgment rule.7 However, the court rejected that defense because it was reasonably conceivable that Musk was Tesla’s controlling stockholder. Therefore, the transaction was subject to entire fairness review under the doctrine of inherent coercion.8