Delaware Supreme Court Affirms Decision to Use Business Judgment Standard of Review in Controlling Stockholder Buyout Where Merger Conditioned Ab Initio on Two Procedural Protections — Majority of Minority Vote and Special Committee Approval
This post was prepared by Kevin F. Brady
Kahn v. M & F Worldwide Corp., Del. Supr., No. 334, 2013 (March 14, 2014)
The Delaware Supreme Court today affirmed the Court of Chancery’s decision granting summary judgment to the defendants under the business judgment standard of review (and not the entire fairness standard) where the controlling stockholder MacAndrews & Forbes conditioned its offer upon the MFW Board agreeing, ab initio, to two procedural protections, i.e., approval by a Special Committee and by a majority of the minority stockholders.
The Supreme Court noted that “[f]or the combination of an effective committee process and majority-of-the-minority vote to qualify (jointly) for business judgment review, each of these protections must be effective singly to warrant a burden shift.” The Supreme Court reviewed the record and found that the defendants “have successfully established a record of independent committee effectiveness and process that warranted a grant of summary judgment entitling them to a burden shift prior to trial.” The Supreme Court also found that the majority-of-the-minority vote was “fully informed and not coerced. That is, the Defendants also established a pretrial majority-of-the-minority vote record that constitutes an independent and alternative basis for shifting the burden of persuasion to the Plaintiffs.”
The Supreme Court stated:
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.
The Court concluded that under the business judgment rule standard of review that applies to this controlling stockholder buyout, “the claims against the Defendants must be dismissed unless no rational person could have believed that the merger was favorable to MFW’s minority stockholders. In this case, it cannot be credibly argued (let alone concluded) that no rational person would find the Merger favorable to MFW’s minority stockholders.