United States: Landmark Case - In re MFW Shareholders Litigation - To Be Appealed

On May 29, 2013, Chancellor Leo E. Strine, Jr. of the Delaware Court of Chancery issued a decision that could potentially impact the structure of future going-private mergers by controlling stockholders. Ruling on a case of first impression, Chancellor Strine held that the business judgment rule—rather than the more arduous entire fairness standard—applies in cases where a going-private merger involving a controlling stockholder has been conditioned on the approval of both a "properly empowered, independent committee" and an "informed and uncoerced" majority-of-the-minority stockholder vote. In re MFW Shareholders Litigation, No. 6566-CS, 2013 WL 2326879, at *1 (Del. Ch. May 29, 2013). On June 25, 2013, the decision was appealed to the Delaware Supreme Court.

Factual and Procedural Background

In June 2011, MacAndrews & Forbes—a holding company owning 43 percent of M&F Worldwide ("MFW")—made a public offer to purchase the remaining shares of MFW's equity in a going-private merger. MacAndrews & Forbes proposed to acquire MFW for $24 per share, but made this offer contingent on the approval of an independent special committee and the affirmative vote of a majority of the minority stockholders.

In response to MacAndrews & Forbes' offer, the MFW board formed a special committee. The special committee employed its own legal and financial advisors, and had the ability to negotiate the merger and definitively accept or reject MacAndrews & Forbes' proposal. The special committee met eight times during the course of three months to negotiate with MacAndrews & Forbes. Eventually, MacAndrews & Forbes raised its price by $1 per share, to $25 per share.

After the special committee approved the $25 per-share price, the minority stockholders voted on the merger, with 65 percent of that minority approving the transaction. Certain MFW stockholders challenged the merger, however, suing MacAndrews & Forbes and the MFW directors. The plaintiffs initially sought a preliminary injunction, but later dropped their injunction request in favor of a post-closing-damages remedy for breach of fiduciary duty. The defendants moved for summary judgment, arguing that the business judgment rule should apply.

The Court's Holding and Analysis

In its decision, the Delaware Court of Chancery noted that since 1994 it has been well established that the entire fairness standard applies even where the approval of a going-private merger involving a controlling stockholder is provided by either a special committee, or the majority of the minority stockholders. However, when one of these two constituencies approves the transaction, the burden of proof shifts from the defendant to the plaintiff to show "fair dealing" and a "fair price." Weinberger v. UOP, Inc., 457 A.2d 701 (1983).

However, the question of what the correct standard of review should be when there is approval by both an independent committee and an informed majority-of-the-minority vote had not been resolved. To make this determination, the court considered whether minority stockholders would be better protected by the application of the entire fairness standard in all cases, or by encouraging controlling stockholders to use both a special committee and a majority-of-the-minority vote.

In discussing special committees and minority stockholder voting, Chancellor Strine emphasized that "a special committee alone ensures only that there is a bargaining agent who can negotiate price and address the collective action problem facing stockholders...and it does not provide stockholders any chance to protect themselves." Chancellor Strine added, "a majority-of-the-minority vote provides stockholders a chance to vote on a merger proposed...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...." The court concluded that each of these two protections is "incomplete and not substitutes, but are complementary and effective in tandem."

The court further explained that when both protections are launched from the merger's inception, the controlling stockholder knows that it cannot bypass the special committee's ability to reject the proposal, and it "cannot dangle a majority-of-the-minority vote before the special committee late in the process as a deal closer" in an effort to avoid paying a higher price. Consequently, the court reasoned that the special committee will be incentivized to negotiate more stridently on behalf of the minority stockholders since these stockholders will vote on any deal approved by the special committee, and can express whether they think the special committee did a sufficient job.

Overall, the court reasoned that "[b]y giving controlling stockholders the opportunity to have a going private transaction reviewed under the business judgment rule, a strong incentive is created to give minority stockholders much broader access to the transactional structure that is most likely to effectively protect their interests." Thus, the Delaware Court of Chancery held that the business judgment rule will apply "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 court stressed, however, that the presumptions of the business judgment rule are only available if each of the following conditions is met:

  • The controlling stockholder from the outset makes the merger contingent on the approval of both a special committee and a majority-of-the-minority stockholder vote
  • The special committee is comprised of independent directors
  • The special committee is empowered to definitively reject the proposal, and to freely employ its own legal and financial advisors
  • The special committee meets its duty of care, and
  • The minority is fully informed and uncoerced

Failure to satisfy any one of these conditions would subject the transaction to an entire fairness standard.

Although the Court of Chancery's decision was recently appealed, if In re MFW Shareholders Litigation is upheld, the case will be a guide to obtaining the more advantageous business judgment standard.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions