It is axiomatic that directors and officers of a Delaware corporation owe fiduciary duties to stockholders (and the company). Controlling stockholders also owe fiduciary duties. A stockholder is deemed a controller either through ownership of 50-plus% of a company’s voting power, or through actual control over its business affairs. Actual control means the stockholder has general control of a company’s business affairs, or specific control of a transaction.
The actual control theory is “not easy to satisfy.” In its recent decision, Scianella v. AstraZeneca UK Limited, C.A. No. 2023-0125-PAF (Del. Ch. July 8, 2024), the Delaware Court of Chancery emphasized that plaintiffs have a steep burden even at the pleadings stage to demonstrate actual control. The court explained that the controller analysis is highly fact specific and no one set of facts will ensure that the standard is met. Instead, to survive a motion to dismiss, the plaintiff must plead a “constellation of facts” supporting actual control. In Scianella, the court held that the pleaded facts were insufficient to demonstrate actual control of the Company by the minority stockholder.
Background and the Court of Chancery’s Decision
AstraZeneca UK Limited and AstraZeneca PLC (AstraZeneca) created Viela Bio Inc. (Viela) to house its biologics research and development business. As part of forming Viela, AstraZeneca received 26.7% of Viela’s outstanding common stock. Five of AstraZeneca’s former executives also took on management positions at Viela, and AstraZeneca designated two of its current executives to Viela’s board. AstraZeneca further continued its relationship with Viela through five crucial commercial agreements, including license, supply and transition services agreements.
According to the plaintiff, a former Viela stockholder, AstraZenca, eventually found a better opportunity: Viela’s competitor. But, as the plaintiff alleged, because of certain regulatory hurdles, AstraZeneca had to unload Viela in order to pursue Viela’s rival. To achieve this purpose, the plaintiff alleged that AstraZeneca pushed through a quick sale of Viela through a merger with Horizon Therapeutics Plc (Horizon). Citing a list of facts purportedly establishing AstraZeneca’s actual control of Viela’s business affairs, the plaintiff alleged that AstraZeneca owed fiduciary duties to Viela and the other stockholders as a controller, and breached duties by pushing through the sale.
For general control of Viela, Plaintiff alleged the following emblematic controller factors:
- AstraZeneca’s blocking rights under Viela’s bylaw and charter;
- AstraZencea’s appointment of directors to Viela’s board;
- AstraZeneca’s appointment of Viela’s management; and
- AstraZeneca’s commercial contracts with Viela relating to mission critical activities.
The plaintiff also alleged that AstraZeneca wielded specific control over the Viela sale transaction by threatening to terminate the Viela’s mission critical contracts; and threatening to sell its equity stake, if Viela’s board did not approve the Horizon deal.
AstraZeneca moved to dismiss the plaintiff’s complaint on the grounds that the plaintiffs failed to adequately plead that AstraZeneca was a controlling stockholder and, thus, AstraZeneca did not owe fiduciary duties. Despite the plaintiff pleading many generally recognized indicia of actual control, the court found that, even at the pleadings stage, the alleged facts did not support an inference of AstraZeneca’s general or specific control.
For example, while Viela’s bylaws and charter required a 75% supermajority vote for certain actions like removing a director for cause, giving AstraZeneca, a holder of 26.7% of the voting stock, a unilateral blocking right, the court found that the blocking right was too limited in scope to support an inference of actual control. Similarly, while AstraZeneca designated two of Viela’s directors and five of its former employees filled executive roles, the court found that these allegations, without more, were insufficient to plead actual control. Likewise, the court was not moved by the various support agreements between the parties because the complaint did not allege that the existence of the agreements totally overcame the Viela board’s independence.
Finally, as to specific control of the Horizon merger, while AstraZeneca was in a position to assert pressure on Viela’s board via the various critical support agreements and its equity stake, the court found that the allegations showed, instead, that AstraZeneca was committed to ensure business continuity support following the Horizon merger and, in any event, the timeline of events did not support an inference that AstraZeneca applied pressure on the board because Viela was already in talks with Horizon. In sum, all of the plaintiff’s facts, even considered together, were still insufficient to plead general and specific control. Accordingly, because AstraZeneca was not a controlling stockholder, it did not owe fiduciary duties, and thus, the court dismissed the breach of fiduciary duty claim against AstraZeneca.
Key Takeaways
Scianella reflects the Court of Chancery’s high bar for asserting a breach of fiduciary duty claim against a minority stockholder based on its actual control of a company. Even at the pleadings stage, and even where the plaintiff pleads recognized indica of general or specific control, the plaintiff’s burden remains high to plead actual control. A complaint will only survive, where a “constellation” of facts create a reasonable inference that the minority stockholder so controls the company or the transaction that the Board’s independent will is overcome.
