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Home > Penn Carey Law Journals > Journal of Business Law > Vol. 27 (2025) > Iss. 3 (2025)

 

University of Pennsylvania Journal of Business Law

First Page

749

Publication Date

Fall 2025

Document Type

Article

Abstract

A core function of corporate law is to prevent those controlling the company from enriching themselves at the expense of the investing public. This presents a particular challenge when the party potentially controlling the company is a shareholder with the votes to elect or remove the directors. Because the law gives directors, not shareholders, official control over the corporation, courts must decide when they can trust directors to stand against overreaching by such a shareholder, and when they should instead scrutinize board decisions involving the shareholder to prevent abuse. Unfortunately, corporate law in the leading state of Delaware is utterly schizophrenic in dealing with this question—a situation made worse by just enacted legislation in the state.

This article responds to the problem with a straightforward solution. The solution begins with consistently applying a presumption that the power of a shareholder to select directors equals the ability of the shareholder to control those directors. Accordingly, those directors presumptively lack the independence in dealing with the shareholder that would justify the court deferring to them. To rebut the presumption, this article proposes following the notion that independence is as independence does. This entails looking at whether the director has a record of saying no to a shareholder with the power of selection. Following this approach will dramatically reduce the confusion and inconsistency in this area of law and substantially improve protection of the investing public, especially in light of the greater trust placed in directors under just enacted Delaware legislation dealing with controlling shareholder transactions.

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