United States: M&A Update: Delaware Supreme Court Upholds Business Judgment Rule Review For Certain Controlling Stockholder Transactions With Dual Minority Protections

Last Updated: March 17 2014
Article by Joshua Apfelroth, Jason M. Halper, Gregory A. Markel, William P. Mills, III and Martin Seidel

Most Read Contributor in United States, September 2018

On March 14, 2014, the Delaware Supreme Court upheld the Court of Chancery's 2013 decision in In re MFW Shareholders Litigation, holding that in going-private mergers where there is a controlling stockholder, the use of both a truly independent special committee and a majority of the minority stockholder vote, allows for judicial review under the deferential business judgment standard. 


In mid-2011, Ronald Perelman's wholly-owned holding company, MacAndrews & Forbes, a 43% stockholder of M&F Worldwide (MFW), made a proposal to take MFW private by acquiring the minority shares at $24 per share.  In its initial proposal, MacAndrews & Forbes indicated that it "would not move forward" without approval from both an independent special committee and a majority of MFW's unaffiliated minority stockholders, and that it had no interest in selling to a third party bidder.  In response to this proposal, the MFW board formed a special committee consisting solely of independent directors.  The special committee ultimately recommended that the board approve and the minority stockholders accept a deal that paid $25 per share, and 65% of the non-controlling stockholders thereafter voted in favor of the transaction.

After closing, MFW stockholders sued MFW, Perelman, and several MFW directors for damages based on allegations of breach of fiduciary duty.  On May 29, 2013, the Delaware Chancery Court granted summary judgment in favor of defendants.  Significantly, in doing so, then-Chancellor (now Chief Judge) Strine determined that the transaction was subject to deferential review under the business judgment rule notwithstanding that controlling stockholder transactions typically are subject to the more rigorous entire fairness standard. The Delaware Supreme Court affirmed both the reasoning employed and outcome reached by the lower court. 


The Supreme Court opinion confirms the availability of a procedural option for controlling stockholders to use in Delaware for structuring controlling stockholder merger transactions to obtain the benefit of deferential review of the transaction under the business judgment rule.  Adopting the MFW "dual minority protection" structure, however, also entails downsides, risks and costs, which need to be evaluated given the specific facts of each transaction.

  1. Special Committee Independence and Empowerment. Much of the Court's factual analysis focused on whether the committee was independent and sufficiently empowered. While the Court applied well-settled Delaware law in determining that the special committee was independent, rejecting typically used arguments about the directors' personal and professional relationships with the controlling stockholder, it elaborated on when a committee is sufficiently empowered.  Importantly, to the Court, the committee had authority to retain independent advisors, negotiate transaction terms and say no to the controlling stockholder.  The Court appeared to discount the fact that the committee did not have authority "to say yes" to a third party offer (or pursue other strategic options) on the ground that MacAndrews & Forbes indicated at the outset its unwillingness to sell and it had no duty to do so, which effectively precluded a third party acquisition.  The Court noted, however, that the committee, with the help of its financial advisor, did consider, as part of its analysis of whether to accept or reject the proposed buy out,  whether there were other potential buyers and what other options were available that might generate more value than the MFW proposal. Where a controlling stockholder's holdings do not amount to a veto right over an acquisition by a third party or where the controlling stockholder does not clearly state at the outset that it is unwilling to sell to a third party, consideration should be given to empowering the committee to pursue other transactions and "say yes" to a third party proposal.
  2. Conduct of Committee.  The Court also found that the committee did its work properly.  The Court cited evidence that the committee met eight times; "screened off" MacAndrews & Forbes employees from the committee's process; had up-to-date projections prepared by MFW's business segments (which reflected deteriorating results); actively negotiated price and obtained another $1 per share; investigated the possibility of other buyers notwithstanding MacAndrews & Forbes' stated unwillingness to sell; and obtained an opinion from its financial advisor that the transaction was fair and within the range of value estimated for the minority stock.  Ultimately, this holding is consistent with Delaware's general respect for the informed decisions of impartial directors.  However, as this and other recent cases make clear, courts will carefully review the committee's actual conduct and decision-making.  If the court concludes that directors are not fully informed or sufficiently proactive in obtaining the best available deal for stockholders, the court will not show deference to the committee's decisions.
  3. Minority Vote.  The Court concluded (and plaintiffs did not contest) that the minority stockholders voting to approve the transaction were fully informed and uncoerced.  The Court observed that the proxy statement accurately disclosed the committee's work and negotiation efforts, information about the projections prepared by management, and five separate price ranges for the value of MFW stock generated by the committee's financial advisor and supporting its fairness opinion.  Again, however, it is not enough just to obtain the requisite percentage of minority votes.  MFW and other recent decisions are clear that courts will not give weight to stockholder votes that are procured by misleading or incomplete information in the proxy statement. 
  4. Timing.  As did the lower court, the Delaware Supreme Court emphasized that the controlling stockholder made clear in its initial proposal and before commencing negotiations that it would only proceed upon receiving approval of an independent special committee and a majority vote of minority stockholders.  In controlling stockholder situations, prospective acquirers and the board both must be cognizant that this timing is quite important.  If the controlling stockholder is willing to agree to these conditions, it should do so at the outset in order to maximize the possibility of deferential business judgment review of the resulting transaction.  Alternatively, the board should insist on and obtain the controlling stockholder's consent to these conditions before engaging with the controlling stockholder and commencing negotiations.  
  5. Execution Risks. There are practical disadvantages to following the "dual protection"  approach. For example, a non-waivable majority-of-the-minority provision can present execution risks that could prevent the deal from receiving stockholder approval.  Dell's recent going-private transaction encountered this problem.  Dell initially conditioned the transaction on approval from a special committee and a majority of outstanding minority shares.  As voting proceeded, however, it became apparent that approval of a majority of the outstanding minority shares would not be obtained.  The controlling stockholder ultimately increased its price in exchange for loosening the minority vote condition such that it would be approved so long as a majority of minority shares actually voted were in favor.  While amending the transaction approval terms in this way could have potentially foreclosed business judgment review,  it enabled the deal to proceed.  Under the unique facts of the Dell transaction, the court was not troubled by this change; however, the outcome in Dell may not serve as a precedent in other transactions.  Accordingly,  potential acquirers, directors and their advisors need to weigh the importance of obtaining a favorable after-the-fact standard of review against offering veto power over the transaction to minority stockholders.
  6. Need To Go Through Discovery.  The Court explained that it may still be difficult to obtain dismissal of a plaintiff's complaint challenging a going-private transaction without discovery to determine if the transaction meets the MFW criteria.  The Court observed that the complaint in this case would have survived a motion to dismiss because it pled "a reasonably conceivable set of facts" calling into question the sufficiency of the price offered and thus the committee's negotiations.  Therefore, companies and their controlling stockholders may have to go through potentially protracted and costly discovery on whether the MFW criteria are met, as well as on the merits, in order to prevail pre-trial at the summary judgment stage.  If triable factual issues remain after discovery and summary judgment about whether "either or both of the dual procedural protections were established" or were effective, then the case will be tried and the transaction will be subject to entire fairness review.

For a copy of the full opinion, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

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
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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.


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.


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