Tornetta v. Musk: The Delaware Court of Chancery Reviews Executive Compensation to Controlling Stockholders

October 2019


In Tornetta v. Musk, the Delaware Court ofChancery, addressing “issues of first impression inDelaware,” held that the rigorous entire fairnessstandard of review applies to a board’s executive compensationdecisions in respect of a controlling stockholder,absent compliance with the so-called MFWprocedural protections. Those protections involveconditioning a controlling stockholder transaction,at the outset of negotiations, on the obtainment ofboth approval by a fully functioning special committeeof independent, disinterested directors and a voteby a majority of the minority stockholders, acting ona fully informed basis. Although the MFW test wasdeveloped and originally applied in the context of acontrolling stockholder buyout, the Tornetta Courtheld that, due to the specter of structural coercioninherent in any conflicted controller setting, compliancewith the MFW conditions “is key to allaying thecourt’s suspicions” in a manner sufficient to restorethe presumption of the business judgment rule.

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