Richards Layton & Finger

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

October 2019

In Tornetta v. Musk, the Delaware Court of Chancery, addressing “issues of first impression in Delaware,” held that the rigorous entire fairness standard of review applies to a board’s executive compensation decisions in respect of a controlling stockholder, absent compliance with the so-called MFW procedural protections. Those protections involve conditioning a controlling stockholder transaction, at the outset of negotiations, on the obtainment of both approval by a fully functioning special committee of independent, disinterested directors and a vote by a majority of the minority stockholders, acting on a fully informed basis. Although the MFW test was developed and originally applied in the context of a controlling stockholder buyout, the Tornetta Court held that, due to the specter of structural coercion inherent in any conflicted controller setting, compliance with the MFW conditions “is key to allaying the court’s suspicions” in a manner sufficient to restore the presumption of the business judgment rule.