In Re CNX Gas Corp. Shareholders Litigation, C. A. Consol. No. 5377-VCL (Del Ch. May 25, 2010), read 42-page opinion here. This will be a very short overview until a fuller synopsis can be provided at a later date.
The Delaware Court of Chancery denied a request for a preliminary injunction in this expedited matter in which the representatives of a putative class of minority stockholders challenged a controlling stockholder freeze-out structured as a first-step tender offer to be followed by a second-step short-form merger.
Applicable Standard of Review
The Court applied the unified standard for reviewing controlling stockholder freeze-outs described in the case of In Re Cox Communications, Inc., Shareholders Litigation, 879 A.2d 604 (Del. Ch. 2005), but explained first as follows at page 14 of the slip opinion:
" As knowledgeable readers understand all too well, Delaware law applies a different standard of review depending on how a controlling stockholder freeze-out is structured." (citing Kahn v. Lynch Communications Systems Inc., 638 A.2d 1110(Del. 1994)).
The entire fairness standard was applied to the facts of this case for several reasons: (i) the special committee did not recommend the transaction; (ii) the special committee was not provided with the authority to bargain with the controller on an arm’s length basis; and (iii) there was a reasonable question about the effectiveness of the majority-of-the-minority tender condition. The "flip side" of that is the reason the BJR did not apply .
That is, the BJR did not apply because there was no affirmative recommendation by the special committee AND there was no approval by the majority of unaffiliated stockholders.
Reason Why Preliminary Injunction Denied
The Court reasoned that in light of the fairness standard applying, any harm to the putative class could be remedied by a post-closing damages action. Moreover: (i) there was no viable disclosure claim; and (ii) the tender offer was not coercive.
Professor Davidoff writes about the case here and summarizes it succinctly as follows:
Back on May 25, Vice Chancellor J. Travis Laster of Delaware’s Chancery Court issued an important opinion in In re CNX Gas Corp Shareholders Litigation on the legal standard governing “freeze-out” tender offers, transactions where a majority shareholder squeezes out the minority through a tender offer.
Vice Chancellor Laster’s opinion upset what the world thought had been the standard set by Vice Chancellor Leo E. Strine Jr. in the Pure Resources opinion. In that opinion, Vice Chancellor Strine ruled that a court would not strictly review a “freeze-out” transaction if it complied with certain procedural requirements, including allowing for a special committee of independent directors to recommend for or against the offer.
Vice Chancellor Laster modified the rule to require that the controlling shareholder receive “both the affirmative recommendation of a special committee and the approval of a majority of the unaffiliated stockholders”. In other words, the approval of the special committee is now required, whereas before the committee could recommend no, so long as it was allowed to do so. This substantially shifts the bargaining power to minority shareholders in freeze-out transactions.
The new opinion left people scratching their head as to which was the appropriate standard, …
This leaves controlling shareholders wondering what to do in structuring these transactions. The result is that shareholders will most likely pick the stricter standard, lest they risk getting assigned a judge who disagrees with Vice Chancellor Laster.
SUPPLEMENT: Subequent to this opinion, the Court of Chancery authorized an interlocutory appeal of its decision here, seeking guidance from Delaware’s High Court regarding the correct, controlling applicable standard, but the Supreme Court here declined to accept the appeal.
Courtesy of The Courtroom View Network, here is a video/audio clip of the hearing on the preliminary injunction motion. Also available here is a review of the case, highlighting its support of a "unified standard", on the Harvard Law School Corporate Governance Blog.