Court Of Chancery Explains Special Benefit Rule

Frank v Elgamal, C.A. 6120-VCN (March 30, 2012)

It is well understood that when a controlling stockholder stands on both sides of a transaction with his controlled entity that he will need to show the transaction is entirely fair to the other owners.  But when he receives such a special benefit so as to be on both sides of the deal is not always so easy to decide.  After all, it is common such acquirors to want to retain management.  If the insiders get an employment contract, do they stand on both sides of the negotiations?  This decision helps to answer that question.  In general, if the controllers get an equity interest in the surviving entity to a merger that is not shared with the other owners, then they are on both sides of the transaction and must show it is entirely fair.

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