United States: Business Judgment Rule Deemed The Applicable Standard In Going Private Merger Where Transaction Approved By Special Committee And Majority Of The Minority

Addressing an issue that has been for the first time squarely presented to any Delaware Court, the Court of Chancery in In Re MFW Shareholders Litigation, C.A. No. 6566-CS, May 29, 2013,  ruled that “when a controlling stockholder merger has, from the time of the controller’s first overture, been subject to (i) negotiation and approval by a special committee of independent directors fully empowered to say no, and (ii) approval by an uncoerced, fully informed vote  of a majority of the minority investors, the business judgment rule standard of review applies.”   The Court recognized that the Delaware Supreme Court in Kahn v. Lynch Commc’n Sys. (Lynch I), 638 A.2d 1110, 1117 (Del. 1994), held that the approval by either a special committee or the majority of the noncontrolling stockholders of a merger with a buying controlling stockholder shifted the burden of proof under the entire fairness standard from the defendant to the plaintiff.  The Chancery Court, however, noted that the Delaware Supreme Court was never given a chance to determine whether a controlling stockholder merger conditioned on both independent committee approval and a majority of the minority vote should receive the protection of the business judgment.  Under such a set of facts, the Court of Chancery found that the business judgment rule standard rule applies. The Court based its holding on the comfort level afforded by having both procedural protections in place despite the presence of a controlling shareholder, as opposed to solely one or the other.  The Court reasoned that “a transactional structure with both these protections is fundamentally different from one with only one protection.  A special committee alone ensures that there is a bargaining agent who can negotiate price and address the collective action problem facing stockholders, but it does not prove stockholders any chance to protect themselves.”  Likewise, “a majority-of-the-minority vote provides stockholders a chance to vote on a merger proposed by a controller-dominated board, but with no chance to have an independent bargaining agent work on their behalf to negotiate the merger price, and determine whether it is a favorable one that the bargaining agent commends to the minority stockholders for acceptance at a vote.”  For a copy of the Court’s full analysis click here.

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