Special committees in Delaware have an important role for cleansing various kinds of conflicted transactions, everything from negotiating controlling shareholder deals to vetting derivative lawsuits.  There is no rule regarding committee size; the Board can populate a committee with as many or as few people as it wants.

That said, Delaware caselaw suggests that courts will be somewhat suspicious of special committees consisting of only one member.  That member must be “'like Caesar's wife… above reproach.” Gesoff v. IIC Industries, 902 A.2d 1130 (Del. Ch. 2006).  In Gesoff, VC Lamb stated that a single member special committee would get “a higher level of scrutiny,” and noted that in that case, the special committee member deferred too much to a controlling shareholder – something that might not have happened if a “moderating influence,” via a second member, had been available.

Since then, however, a couple of decisions have blessed the actions of single-member special committees.

And then came the Delaware Supreme Court’s decision in In re Match Group Derivative Litigation, which held that – at least when a corporation attempts to cleanse a controlling shareholder transaction – all special committee members, and not just a majority of them, must be independent.

Which raises the question: in controlling shareholder situations, should boards create committees of one?

Independence is assessed after the fact, and especially in recent years – as the Delaware courts have become more nuanced in their analysis – it’s not always obvious who will count as independent after the fact.  The more members you add to a committee, the more chance that, later, a court will determine one of them was not independent.

And though there’s a lot of language in Delaware opinions about gimlet eyes being cast on single-member committees, it’s not exactly clear what the discount rate is.

Anyway, this is obviously an issue in Tornetta v. Musk; there, the “ratification” procedure involved a committee of one, and it’s not clear how Chancellor McCormick will approach the matter.  There are a lot of different directions she could go – she could say that ratification simply isn’t possible, she could say that Musk was only a controlling shareholder for the purposes of the original package and not for the ratification, or anywhere in between.  But Tornetta is an unusual situation in a lot of ways; I’m wondering what the calculus will be going forward for more traditional transactions.

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Photo of Ann Lipton Ann Lipton

Ann M. Lipton is Tulane Law School’s Michael M. Fleishman Professor in Business Law and Entrepreneurship and an affiliate of Tulane’s Murphy Institute.  An experienced securities and corporate litigator who has handled class actions involving some of the world’s largest companies, she joined …

Ann M. Lipton is Tulane Law School’s Michael M. Fleishman Professor in Business Law and Entrepreneurship and an affiliate of Tulane’s Murphy Institute.  An experienced securities and corporate litigator who has handled class actions involving some of the world’s largest companies, she joined the Tulane Law faculty in 2015 after two years as a visiting assistant professor at Duke University School of Law.

As a scholar, Lipton explores corporate governance, the relationships between corporations and investors, and the role of corporations in society. Read More