A recent Delaware Supreme Court decision, in a one-page Order, affirmed a bench ruling by the Court of Chancery that appears to have been the first application of a deferential standard announced by Delaware’s high court in the case of Kahn v. M & F Worldwide Corp., Del. Supr., No. 334, 2013 (March 14, 2014), highlighted on these pages. The one-page en banc Order of affirmance was entered in the matter of Swomley v. Schlecht, et al., [SynQor], No. 180, 2015, Order (Del. Nov. 19, 2015).
The M & F Worldwide decision established a deferential standard of review if, and only if, certain prerequisites were followed, as quoted below from the opinion:
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.
Insights into the Supreme Court’s affirmance may be gleaned from the oral argument presented before the one-page Order was entered. The Chancery Daily, the unparalleled chronicler of corporate litigation before the Court of Chancery and appeals from that Court’s decisions, provided extensive reporting of the oral argument at which the Chief Justice questioned the utility of footnote 14 from the M & F Worldwide opinion. That footnote creates confusion in the minds of some readers because it can be read to be in tension with the larger holding in the case. If someone challenges the price in a deal, and that price issue could prevent dismissal even if all other criteria of the standard were satisfied, then the standard applicable in the case would be much less effective.
Supporting this interpretation is the rationale behind allowing fully informed and non-coerced stockholders to make decisions. Again courtesy of The Chancery Daily, is a reference to a Chancery decision from the Chief Justice while he was serving as a Vice Chancellor in the matter of Chesapeake Corp. v. Shore, et al., C.A. No. 17626-VCS, memo op. (Del. Ch. Feb. 7, 2000), in which he asked a somewhat rhetorical question: “… If stockholders are presumed competent to buy stock in the first place, why are they not presumed competent to decide when to sell in a tender offer after an adequate time for deliberation has been afforded them?”
That quote may be seen as a precursor of sorts to a theme presented by a current Vice Chancellor whose presentation at a recent seminar was highlighted on these pages. That presentation suggested a direction that Delaware corporate case law is moving in: acknowledging the increased sophistication of many investors who are in a position to decide certain issues for themselves without the need for a paternalistic approach from the courts.