Controlling Shareholders in M&A

Controlling shareholders deserve particular attention in M&A because they may have acute conflicts of interest.

To be sure, notwithstanding the presence of a controlling shareholder, every merger and most other steps in an M&A transaction still need to be reviewed by the full board, whose members may not have the same conflict of interest (in particular, the controlling shareholder may not be a member of the board). Technically, the board may recommend the transaction only if it is good for the corporation as a whole. But even if all directors are technically completely independent, the directors must also be aware that the controlling shareholder could replace them at any moment (under the default rules, DGCL 141(k), 228; but even a staggered board etc. would merely delay the replacement). There is thus always a suspicion that the board may be driven to be partial to the controlling shareholder’s interests.