Delaware Supreme Court Affirms Roadmap for Business Judgment Review in Going-Private Merger Transactions

March 17, 2014

On March 14, 2014, the Supreme Court of Delaware handed down an important decision in Kahn, et al., v. M&F Worldwide Corp., et al., No. 334, 2013 (Del. Mar. 14, 2014), affirming a decision of the Delaware Court of Chancery in which then-Chancellor Leo Strine approved a deal structure in which going-private merger transactions with controlling stockholders could be reviewed under the deferential business judgment rule standard, rather than the exacting entire fairness standard.  (Gibson Dunn’s summary of the Court of Chancery decision is available here).

The litigation arose out of a transaction in which a 43% holder of MFW sought to take the company private.  At the outset, the controlling stockholder made clear that its acquisition proposal had two irrevocable conditions:  that the transaction had to be approved by an independent special committee of the MFW Board of Directors; and that a majority of the minority stockholders also approve the transaction.  After negotiating with the controlling stockholder and due consideration, the special committee approved the transaction, which was then approved by a majority of the minority stockholders.  In the litigation that followed, Chancellor Strine granted defendants’ motion for summary judgment, concluding–after extensive discovery–that there were no disputed facts as to the independence of the special committee and approval by a majority of the minority stockholders, and that the two deal protections provided sufficient protection to minority stockholders to warrant review under the business judgment rule rather than the entire fairness standard.

The Supreme Court affirmed, concluding that the business judgment rule applies to going-private transactions with controlling stockholders “where the merger is conditioned ab initio upon both the approval of an independent, adequately empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.”  According to the Court, because the record before the Chancery Court made clear that the transaction was conditioned on, and ultimately approved by, an independent special committee empowered both to negotiate price and terms and to say “no”, and an informed, non-coerced vote of the minority stockholders, the business judgment rule applied, and the Chancery Court properly granted summary judgment for defendants.

While parties engaged in going-private merger transactions of the type addressed in MFW will no doubt take comfort in the clarity provided by the Supreme Court, the decision also suggested that litigation attacking these kinds of transactions may not be resolved at the pleadings phase and may require discovery.  In fact, the Supreme Court noted in a footnote that the transaction at issue in the case at hand would have survived a motion to dismiss based on allegations attacking the adequacy of the special committee’s negotiations.  Thus, even if the business judgment rule ultimately applies to going-private transactions with controlling stockholders, getting there through litigation may still involve costly and time-consuming discovery.  Given the near certainty that these kinds of transactions will be challenged through litigation, and that in some cases these cases may survive a motion to dismiss, controlling stockholders and practitioners must work to establish a clear record that such transactions were conditioned on, and approved by, a truly independent special committee and a non-coerced majority of the minority stockholders.

The opinion is available here.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:

Brian M. Lutz – New York (212-351-3881, [email protected])
Eduardo Gallardo – New York (212-351-3847, [email protected])

Please also feel free to contact any of the following lawyers: 

Jeffrey A. Chapman – Dallas (214-698-3120, [email protected])
Barbara L. Becker – New York (212-351-4062, [email protected])
Stephen I. Glover – Washington, D.C. (202-955-8593, [email protected])
Dennis J. Friedman – New York (212-351-3900, [email protected])
Jonathan K. Layne – Los Angeles (310-552-8641, [email protected])
James Hallowell – New York (212-351-3804, [email protected])
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– Orange County (949-451-4108, [email protected])
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