Chancery Applies Business Judgment Rule to Freezeout by Majority Shareholder
In Re MFW Shareholder Litigation, C.A. No. 6566-CS (Del. Ch. May 29, 2013).
Issue Addressed: What standard of review should apply to a going-private merger conditioned upfront by the controlling stockholder on approval by both a properly empowered, independent committee and an informed, uncoerced majority-of-the-minority vote.
Short Answer: 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 of review applies. [This case was argued before an en banc Delaware Supreme Court on Dec. 18, 2014, and the appeal is pending.]
This important Court of Chancery opinion is destined to be cited often as a seminal decision regarding the standard of review in freezeouts and related transactions involving a majority shareholder. It announces unequivocally a standard applicable to these transactions, whereas previously the applicable standard was often debated but unresolved. Because it has already generated substantial commentary within the few days of its issuance among academics, practitioners and the press, at this time I will refer the reader to some of the existing commentary about the case. For example, a favorite and a friend of the blog, Professor Stephen Bainbridge, whose scholarship was cited in this opinion, provided the following post on this case:
On Wednesday, Chancellor Leo Strine of Chancery Court gave companies a powerful incentive to build both independent board review and minority shareholder approval into the going-private process, writing new law that should boost shareholder protections. Strine granted summary judgment to M&F Worldwide, finding that the board did not breach its duty to shareholders when it approved a $25 per share offer by MFW’s controlling shareholder, MacAndrews & Forbes (which, in turn, is wholly owned by Ron Perelman). Of much broader significance, the chancellor also said, in a scholarly opinion devoid of the usual Strinian flourishes of rhetoric, that because MFW structured the deal process so that an independent board committee negotiated the transaction and minority shareholders subsequently approved it, the deal should be evaluated under the deferential business judgment standard, not the more rigorous entire fairness standard.
“This conclusion is consistent with the central tradition of Delaware law, which defers to the informed decisions of impartial directors, especially when those decisions have been approved by the disinterested stockholders on full information and without coercion,” Strine wrote. “Not only that, the adoption of this rule will be of benefit to minority stockholders because it will provide a strong incentive for controlling stockholders to accord minority investors the transactional structure that respected scholars believe will provide them the best protection.” And as an added benefit, Strine said, companies that subject going-private deals to the scrutiny of both an independent board committee and a vote of minority shareholders will have an easier time fending off litigation challenges to their transactions by minority shareholders.
Even the chancellor seems sure that his is not the last word on structuring buyouts to receive business judgment deference. He noted several times that he is offering his interpretation of Supreme Court precedent and invited the justices to set him straight if he’s wrong. But in the meantime, corporate lawyers advising on going-private deals will have to think hard about the sale process. And shareholder lawyers will have to think just as hard about whether it makes economic sense to challenge transactions that will be evaluated under the business judgment standard.
Go read the whole thing.
Many other commentators have provided summaries of the case within a few days of this opinion’s publication. See, e.g., this link. See also this link. Professor Larry Hamermesh, one of Delaware’s favorite corporate law scholars, provides insightful analysis of the opinion here. The good professor, in addition to noting the more substantive aspects of the opinion, also observes the far-reaching discussion in the opinion about dicta, or dictum, and what parts of any opinion, in general, are restricted to the facts and legal issues presenting in a particular case.