Delaware judges have long struggled with how to treat controlling stockholders when a company is sold, and the problem is even more acute when the controller owns high-vote stock that may reflect a relatively modest economic stake in a company. Delaware law is clear that such a stockholder is under no obligation to sell, but judges become uncomfortable when a controlling stockholder demands more than others receive in order to approve a transaction.

Sam Glasscock, who was appointed to the Delaware Court of Chancery last June, faced this issue in his first important case as a vice chancellor in a suit brought by shareholders of Delphi Financial Group Inc. that challenged the company's $2.7 billion sale to Tokio Marine Holdings Inc. The judge's refusal to dismiss the case reflected the same discomfort with differential consideration apparent in two opinions by former Chancellor William B. Chandler III.

Robert Rosenkranz founded Delphi in 1987 and has served as its CEO ever since. He took Delphi public in 1990 and controlled the insurance holding company through a class of stock that carried 10 votes a share compared with the single vote that went with a share of ordinary common. When TMH approached Rosenkranz last year about a potential acquisition of Delphi, he said he wasn't interested in selling, but the Japanese insurance company offered a 106% premium to the then-current trading price of Delphi common, and he reconsidered.

Despite the lavish offer, Rosenkranz demanded an additional premium for his high-vote stock, as was his legal right. "Rosenkranz retained control of Delphi," Glasscock wrote. "Among the rights associated with control is the ability to seek a control premium should Delphi be sold." While Rosenkranz was negotiating with TMH on behalf of Delphi, he was haggling over his personal premium with a special committee of Delphi independent directors. TMH ultimately agreed to pay $46 per share for Delphi, and the special committee convinced Rosenkranz to accept $53.875 a share rather than the $59 he initially sought, which left public shareholders with $44.875 a share. A majority of those shareholders had to approve the transaction.

The special committee and the majority of the minority vote should have led Glasscock to review the deal under the highly deferential business judgment rule. As Glasscock noted, the controlling case is Chandler's 2009 decision in shareholder litigation challenging the sale of John Q. Hammons Hotels Inc., another deal where a controlling shareholder demanded a premium. (The Hammons deal was not conditioned on a majority of the minority.) But Hammons may not apply when the controlling shareholder has engaged in "threats, coercion or fraud," and Glasscock found such behavior on the part of Rosenkranz.

Delphi's charter of incorporation barred disparate consideration for the company's two classes of stock. That didn't prevent Rosenkranz from seeking his premium, which he asked other shareholders to bless by amending the charter at the same time as they voted for the sale. As a matter of Delaware law, shareholders may approve an amendment to the charter, but in this context, Glasscock held, Rosenkranz had violated his implied covenant of good faith and fair dealing with other stockholders by conditioning his approval of the merger on receipt of a control premium that he had forgone.

Some lawyers carped that Glasscock should have explicitly limited his ruling to the situation in Delphi and based it on fiduciary duty or equity grounds rather than logic that adds confusion to the process. But Delaware judges are forced to stretch the law to discourage disparate-consideration deals -- or, as Glasscock put it, from "letting a thousand Rosenkranzes bloom." In 2005, Chandler declined to dismiss a suit challenging the 1998 sale of TCI Group to AT&T Corp. TCI's John Malone demanded and got more for his high-vote shares than did holders of TCI common, and Chandler attacked the process by which a TCI special committee approved the deal and its failure to get a relative fairness opinion. The Delphi special committee retained Lazard in part to evaluate Rosenkranz's premium, which the committee negotiated down, but Glasscock doesn't cite TCI.

Glasscock did cite Chancellor Leo E. Strine Jr.'s decision in the El Paso Corp. shareholder litigation, where he allowed the vote on El Paso's sale to Kinder Morgan Inc. to proceed despite concerns about the process. Glasscock followed suit, suggesting that Strine's comments about the costs of deferring a shareholder vote will resonate beyond El Paso.

David Marcus covers legal matters for The Deal magazine.