Opinion ID: 2156563
Heading Depth: 1
Heading Rank: 13

Heading: Control and Ownership

Text: When it stated that, as a practical matter Weinstein may not be able to cause Mays to produce the documents without taking some extraordinary steps, the Court of Chancery may have been referring to Weinstein's ability to replace some of Mays' board members with persons who might be more willing to produce the subsidiary's documents. To the extent that was what the Court of Chancery had in mind, its approach is inconsistent with a well-established legal proposition: even if a controlling stockholder is able to elect a majority of the subsidiary's board of directors, that ability, without more, does not automatically establish that the parent controls the affairs of the subsidiary corporation for purposes of causing the subsidiary to produce its books and records. For publicly held corporations, the Delaware General Corporation Law contemplates a separation of control and ownership. [16] The board of directors has the legal responsibility to manage the business of the corporation for the benefit of its stockholders. [17] This Court has consistently held that the fact the directors of a corporation are elected by the majority stockholder does not relieve those directors of their fiduciary duties to the corporation and its minority stockholders. [18] As Professor DeMott has observed: The parent, once having elected directors, does not have a right thereafter to interfere. To impose a duty of obedience on directors, moreover, would conflict with the fundamental point that corporate law assigns ultimate managerial power and responsibility to directors. The parent thus lacks the right to assert control through interim instructions, a defining hallmark of a legal relationship of agency. This is not a point of merely formal or definitional significance. As the preceding discussion illustrates, the distinction between a right of control and the effective power to control often has practical consequences. In the absence of a right to control the directors it elects, the parent must either disregard their existence, a move disrespectful of the corporate paraphernalia that jeopardizes the corporate veil insulating the parent from subsidiary-level liabilities, or the parent must take steps to exercise its power by coercing the directors or removing them, moves that have drawbacks of their own. [19] Mays is a publicly-held New York corporation that is separate from Weinstein. Its directors have an independent duty to protect and further the interests of Mays. The Court of Chancery recognized this when it granted a stay pending appeal, stating that Mays is a separate legal entity with minority shareholders and that the fiduciary duties of the Mays directors do not run directly to Weinstein and Weinstein does not have the unfettered power to tell the Mays board of directors what to do. Although the Court of Chancery correctly acknowledged that independent duty, its interpretation of section 220(b)(2)b did not give that duty appropriate legal deference.