In re Orchard Enterprises Inc. Stockholder Litigation

Delaware Court Rules that 17.5% Shareholder May Be Controlling Stockholder

On November 26, 2014, the Delaware Court of Chancery denied a motion to dismiss a complaint challenging a going-private transaction where the company’s CEO, Chairman and 17.5% stockholder was leading the buyout group.  In his decision in the case, In Re Zhongpin Inc. Stockholders Litigation, Vice Chancellor Noble concluded that the complaint pled sufficient facts to raise an inference that the CEO, Xianfu Zhu, was a controlling stockholder, and as a result, the deferential business judgment rule standard of review did not apply.  Instead, the far more exacting entire fairness standard governed, which in turn led the Court to deny the motion. 

This is the fourth recent decision to address when a less-than 50% stockholder can be considered a controller, an issue that determines whether the alleged controller owes fiduciary duties to other stockholders and the standard of review the Court will apply in evaluating the challenged transaction.  The decision therefore provides important guidance for directors and their advisors in structuring transactions involving large stockholders.

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