Originally published in ALM's Delaware Business Court Insider
When a creditor who also owns significant equity exercises rights to foreclose because the debtor company is unable to meet its debt obligations, issues can arise as to whether the creditor/stockholder owes fiduciary duties as a controller, whether the foreclosure requires a stockholder vote under Section 271 of the Delaware General Corporation Law (DGCL), and whether any claims a plaintiff stockholder may have are direct or derivative. The Court of Chancery’s opinion in Glean Tech Fund II v. McIntosh, C. A. No. 2024-0032-PAF (Del. Ch. Sept. 2, 2025) thoughtfully addresses each of these issues, finding that the creditor was not a controller, that no stockholder vote was required, and that the claims asserted against the director defendants were derivative. The Glean Tech opinion provides guidance on each of these often-recurring issues.
Background
The GleanTech Fund plaintiffs, stockholders in Clutter Holdings, Inc. (the company), attacked a three-stage transaction: foreclosure on all the company’s assets by the senior lender, followed by a sale in public auction of the operating assets to the junior creditor, Iron Mountain, and subsequent sale by Iron Mountain of 15% of the acquired equity to select former company stakeholders. The plaintiffs alleged that the foreclosure was a sale of substantially all the company’s assets requiring a stockholder vote under Section 271 of the DGCL, that Iron Mountain was a controlling stockholder who breached fiduciary duties, that the director defendants failed to prevent the allegedly unfair transaction, and that the foreclosure wiped out the plaintiffs’ equity causing injury to the plaintiffs as a direct harm and resulting in a nonderivative claim. As explained below, the court dismissed all of the plaintiffs’ claims.
Court Finds the Plaintiff Failed to Allege That the Junior Lender Who Owned 27% of the Equity Was a Controlling Stockholder
The court held that the plaintiffs failed to allege that Iron Mountain’s 27% equity stake enabled it to exercise general or transaction-specific control. Considering the plaintiffs’ allegations holistically, the court held that the plaintiffs failed to allege that the junior creditor “possessed any power to veto any transaction or control the composition of the board.” While the plaintiffs had alleged that 80% of the company’s commercial leases were with Iron Mountain, the court noted that plaintiffs failed to allege that “the contracts gave Iron Mountain any governance rights over [the company]”, or that the contracts were not the product of arms-length negotiations, or that “Iron Mountain threatened to terminate or force renegotiation of any of these contracts at any time.” In these circumstances, the court found that the plaintiffs had failed to allege that Iron Mountain was a controller who owed fiduciary duties in the transaction.
Court Rejects the Plaintiffs’ Claims That the Director Defendants Breached Fiduciary Duties by Failing to Prevent the Foreclosure Sale
Applying the Delaware Supreme Court’s Tooley test, the court found that the plaintiffs’ claims against the director defendants were derivative and not direct because the plaintiffs failed to allege any injury to them independent of injury to the company. The court found that the plaintiffs had attempted to plead direct harm based on “special injury”—the wiping out of their equity—but that the Delaware Supreme Court had rejected that concept in Tooley. Having also concluded that plaintiffs failed to allege facts that a majority of the board would be unable to consider a demand, the court rejected the plaintiffs’ claims of breach of fiduciary duty since plaintiffs had failed to make demand on the Board prior to pursuing their derivative claims.
Court Finds the Plaintiffs Failed to State a Claim Under Section 271 of the DGCL
While acknowledging that the plaintiffs’ claim that the transaction was void because there was no stockholder vote was direct, the court held that based on the pleaded facts, “it is not reasonably conceivable that a stockholder vote was required under Section 271 to effectuate the foreclosure sale in this case.” Among other factors, the court noted that plaintiffs had failed to allege that the company took any action to facilitate the foreclosure sale. The court relied on Court of Chancery and Supreme Court precedent in concluding that Section 271 did not require a stockholder vote for judicial foreclosures initiated by a creditor.
Lesson Learned
Glean Tech provides important guidance for transaction planners in advising creditors with substantial equity interests whether their exercise of contract rights to foreclose may require a stockholder vote and whether the creditor might be deemed a controller and therefore owe fiduciary duties. Where the contract rights do not allow the creditor to control the board and where the facts do not otherwise support general or transaction-specific control, a Delaware court is unlikely to find that the creditor/stockholder owes fiduciary duties as a controlling stockholder. Glean Tech also reaffirms that unless a certificate of incorporation otherwise requires, a stockholder is not entitled to a stockholder vote under Section 271 when assets are transferred to a secured creditor in a foreclosure sale initiated by the creditor.
Applying the Delaware Supreme Court’s Tooley test, the court found that the plaintiffs’ claims against the director defendants were derivative and not direct because the plaintiffs failed to allege any injury to them independent of injury to the company.
