On May 29, 2013, In In re MFW Shareholders Litigation, C.A. No. 6566-CS (Del. Ch. May 29, 2013), the Court of Chancery decided a novel question of law, holding that the business judgment rule applies to a controlling stockholder going-private transaction, which is conditioned upon, or obtains, approval by an independent special committee and a majority of unaffiliated minority shareholders.
MacAndrews & Forbes was the controlling shareholder of M&F Worldwide, owning 43 percent of the company. On June 13, 2011, MacAndrews & Forbes offered to purchase the remaining 57 percent of M&F Worldwide's equity in a going-private transaction. MacAndrews & Forbes conditioned its offer on approval (i) by an independent special committee and (ii) a majority of the unaffiliated minority stockholders. The transaction received both approvals. Nonetheless, shareholders sued MacAndrews & Forbes alleging that the transaction was unfair. The shareholders alleged that because MacAndrews & Forbes was a controlling shareholder, the dispute must be reviewed under the entire fairness standard. MacAndrews & Forbes countered, asserting that because the transaction was conditioned upon, and actually received, approval by both an independent special committee and a majority of the unaffiliated minority shareholders, the dispute must be reviewed under the business judgment standard.
It is well understood that, under Delaware law, a controlling stockholder going-private transaction is generally subject to the entire fairness standard of review, not the business judgment rule. It is also well-settled Delaware law that approval by a special committee or a majority of the minority shareholders shifts the burden of proof from the corporation to the shareholders, but does not change the standard of review. Delaware courts have never decided, however, which standard of review to apply if a transaction was approved, or conditioned upon approval, by a special committee and a majority of the minority shareholders.
Upon finding that the issue posed a "novel question of law," the Court of Chancery definitively resolved the issue, holding 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 reasoned that "the rule of equitable common law that best protects minority investors is one that encourages controlling stockholders to accord the minority this potent combination of procedural protections." Because it was undisputed that both mechanisms were employed properly, the court applied the business judgment rule and granted summary judgment for defendants.
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