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Delaware Court Addresses Meaning of “Affiliate”

By | October 31, 2019

PWP Xerion Holdings III LLC v Red Leaf Resources, Inc. discussed disputed consent rights in connection with a joint venture.  In so doing, Vice Chancellor Laster had to consider the meaning of the word “affiliate.”

Citing Websters, the Court noted under the plain meaning of the term, someone “affiliated” with a person or organization is “closely associated with” the person or organization, “typically in a dependent or subordinate position.” The Court stated as customarily interpreted, an officer or director of an entity is affiliated with that entity.

The Court looked to other definitions of “affiliate” as well.  Under Section 203 of the Delaware General Corporation Law, “‘[a]ffiliate’ means a person that directly, or indirectly through 1 or more intermediaries, controls, or is controlled by, or is under common control with, another person.”  The term “‘control, including the terms ‘controlling,’ ‘controlled by’ and ‘under common control with,’ means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract or otherwise. . . .” The Court also discussed similar definitions in a stockholders agreement the parties had entered into and the definition under Rule 144 of the Securities Act.

The Court noted under these control-based definitions:

  • An officer or employee of an entity is affiliated with that entity.
  • An officer meets the definition because he is under the control of and accountable to the governing body of the entity he serves.
  • An employee is similarly under the control of and accountable to the entity that employs him.

The foregoing discussion may largely be dicta in the context of the overall holding. It’s not my understanding however that transactional lawyers generally think all officers and employees are affiliates, whether when drafting an acquisition agreement or interpreting the term under securities laws.

Contact Steve Quinlivan for more information.