In a 2013 decision, the Delaware Court of Chancery ruled that the business judgment standard of review should apply to a going-private transaction where certain procedural safeguards were implemented to protect minority stockholders from possible overreach. In re MFW Shareholders Litigation, C.A. No. 6566-CS (Del. Ch. May 29, 2013) (Strine, C.). On March 14, 2014, the Delaware Supreme Court, sitting en banc, affirmed, concluding that it was appropriate for the Court of Chancery to grant summary judgment where the undisputed facts showed approval of the transaction by an independent and empowered special committee of directors, as well as approval by an informed, uncoerced majority of the company's minority stockholders. Kahn v. M&F Worldwide Corp., No. 334, 2013 (Del. March 14, 2014) (Holland, J.).
Generally, a controlling stockholder going-private transaction is subject to the rigorous "entire fairness" standard of review, the "highest standard of review in corporate law." In contrast, the business judgment standard of review is highly deferential, requiring dismissal of a challenge to the transaction unless no rational person could have believed that it was favorable to minority stockholders. Applying the business judgment standard of review permitted the Court of Chancery to dispose of the stockholder challenge to the transaction – which garnered the support of a majority of the minority shareholders – prior to trial.
Several conditions must be met to obtain pre-trial dismissal of a going-private transaction. The Delaware Supreme Court wrote:
To summarize our holding, in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.
If one challenging the transaction can plead facts that these enumerated conditions do not exist, that plaintiff would be permitted to conduct discovery. But the case would be entitled to proceed to trial only if triable issues of fact remain after discovery about whether the procedural protections were established or effective.
A copy of the decision may be found here.
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