Contract Rights and Control

Jill E. Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Carey Law School, and Steven Davidoff Solomon is the Alexander F. and May T. Morrison Professor of Law at the UC Berkeley School of Law. This post is based on their article, Contract Rights and Control, forthcoming in the University of Pennsylvania Journal of Business Law (2025).

In July 2024, Delaware adopted section 122(18) of the DGCL, significantly expanding corporate power to enter shareholder agreements that allocate board-level decision-making authority directly to shareholders. Just months later, in March 2025, the Delaware legislature enacted SB 21, which, among other high-profile reforms, introduced the state’s first statutory definition of a “controlling shareholder.” Together, these developments mark a turning point in Delaware corporate law. Our forthcoming article, Contract Rights and Control, explores how they interact—and sometimes clash—with longstanding fiduciary duty principles.

Section 122(18) was Delaware’s response to the Court of Chancery’s decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. The decision invalidated a shareholder agreement that granted broad veto and approval rights to founder Ken Moelis. The ruling raised alarm about the enforceability of standard shareholder protections in venture-backed and newly public companies. In adopting section 122(18), the Delaware legislature reversed the Moelis decision and explicitly authorized corporations to enter into agreements with shareholders—past, present, or future—that displace traditional board authority, provided those agreements respect the fiduciary duties of directors, officers, and shareholders.

This statute enshrines Delaware’s commitment to contractual flexibility and private ordering. Yet it also creates a doctrinal tension: when should shareholders who exercise board-level powers through contract be deemed “controllers” and subjected to fiduciary obligations and heightened judicial oversight?

The recent amendments to the DGCL contained in SB 21 complicate this analysis. SB 21 was the legislature’s attempt to impose order on Delaware’s evolving “controller” doctrine, which, according to some commentators, had grown increasingly unpredictable following decisions like Tornetta v. Musk and In re Match Group. These cases moved beyond bright-line ownership thresholds to embrace context-specific, power-based definitions of control and to require a demanding procedural approach to conflict-of-interest transactions to avoid the application of entire fairness scrutiny. While the heightened judicial oversight associated with entire fairness scrutiny allowed courts to address abuse, it also created uncertainty and increased litigation risk.

SB 21 provided a variety of responses to these judicial developments including, for the first time, a statutory definition of controlling shareholder. The definition limits the characterization of a shareholder as controlling to someone who (i) owns or controls a majority of voting power; (ii) has the contractual right to elect a majority of directors or directors entitled to cast a majority of the votes of the board; or (iii) has functionally equivalent control and holds at least one-third of voting power. Notably, it incorporates contractual arrangements into its scope but frames them narrowly in terms of the power to elect a majority of the board.

While we support the dual legislative objectives of including contractual arrangements as a measure of control and increasing the predictability of controlling shareholder status for purposes of the application of fiduciary duties, we worry that predicating controlling shareholder status on a narrow view of contractual control – that is, control over the composition of the board of directors — ignores the full impact of section 122(18) in expanding contractual mechanisms for shareholders to exercise control even beyond the control exercised by a traditional majority shareholder. Section 122(18) affirmatively authorizes shareholder agreements that enable a contracting party to displace board authority entirely. A shareholder agreement can now allow a party to appoint officers, veto mergers, direct charter amendments, or compel dividend distributions—powers that go far beyond simply electing directors. Yet under SB 21, a shareholder might not be treated as a controller unless it controls board composition.

This mismatch risks undermining the protective function of fiduciary duties. It could permit shareholders with de facto managerial control to escape judicial scrutiny simply because they lack voting power over director appointments. In our view, both legislative reforms need to be harmonized around a more functional view of power.

To resolve this tension, we propose a two-pronged test for when a shareholder should be treated as a controlling shareholder based on contractual rights. First, we argue that a shareholder who has the contractual right to appoint or remove a majority of directors should be treated as a controller, regardless of equity ownership. This is largely reflected in SB 21, though we recommend clearer drafting to ensure it captures practical control mechanisms beyond formal nomination rights. Second, we recommend that a shareholder who exercises control over specific board-level decisions through contract—for example, the right to approve mergers or appoint officers—should be deemed a controller with respect to those decisions. This “power-specific control” model aligns fiduciary obligations with the scope of influence and preserves shareholder freedom outside those domains.

Absent those characteristics, shareholders who exercise rights pursuant to a shareholder agreement should not, as a result of their contractual rights, be characterized as controllers and subject to enhanced scrutiny.  We explicitly reject the idea that negative control rights—such as vetoes or blocking provisions—should trigger controlling shareholder status. These rights are common and, without more, do not enable shareholders to substitute their will for the board’s. Instead, such provisions should be governed by traditional contract doctrines like the implied covenant of good faith and fair dealing.

Delaware corporate law is in flux. The state has taken commendable steps to reaffirm its embrace of private ordering through section 122(18), and SB 21 offers helpful clarity in a fraught area. Yet these reforms must be reconciled. Fiduciary duties serve a crucial role in guarding against the abuse of power, and they must evolve alongside new mechanisms for allocating control.

Our proposal preserves the contractual freedom envisioned by section 122(18) while ensuring that shareholders who wield effective control—whether through equity or agreement—remain accountable. Courts, legislators, and practitioners should take note: in a world where governance is increasingly negotiated ex ante, the legal framework must distinguish between genuine control and mere contractual preference.

Download the full paper here.