Search results for: MFW

Southeastern Pennsylvania Transportation Authority v. Volgenau, C.A. No. 6354-VCN (Del. Ch. Aug. 5, 2005)

Issue addressed: This Chancery opinion explains the procedures to follow in order to benefit from the business judgment rule’s deferential standard of review for a merger that involves a controlling shareholder and a third-party.

This decision provides a road map for corporate lawyers who seek to establish procedures to follow in order to structure a merger involving a controlling stockholder and a third party, in a manner that is most likely to provide a successful defense to challenges by plaintiffs’ lawyers. As often happens, the selection of the standard of review helped to predict the outcome, and by rejecting the application of the entire fairness standard, the result was more likely.

Professor Bainbridge has a post on this case that quotes from the opinion:

Clothing your M&A deal in both a belt and suspenders is proving to be a solid safety play

Cajun humorist and chef Justin Wilson used to say that he was a “safety man,” as evidenced by his wearing both belt and suspenders. It turns out that that’s a pretty good metaphor for emerging Delaware law. Vice Chancellor John Noble recently held that:

A transaction involving a third party and a company with a controller stockholder is entitled to review under the business judgment rule if the transaction is (1) recommended by a disinterested and independent special committee and (2) approved by stockholders in a non-waivable vote of the majority of all the minority stockholders.

Noble noted that Chancellor Strine had previously reached the same result:

… the Court’s recent decision in In re MFW Shareholders Litigation (“MFW”) illuminates many of the procedural protections at issue in this case. For the first time, the Court addressed the question whether, and under what conditions, a merger between a controlling stockholder and its subsidiary could be reviewed under the business judgment rule, as opposed to the entire fairness standard. The Court held that the business judgment rule could apply if all of the following conditions were satisfied: (1) the controlling stockholder at the outset conditions the transaction on the approval of both a special committee and a non-waivable vote of a majority of the minority investors; (2) the special committee was independent, (3) fully empowered to negotiate the transaction, or to say no definitively, and to select its own advisors, and (4) satisfied its requisite duty of care; and (5) the stockholders were fully informed and uncoerced.

Noble further explained how the case before him extended MFW to a new fact setting:

Unlike MFW, which involved a controlling stockholder on both sides of the transaction, this case involves a merger between a third-party and a company with a controlling stockholder.

Alison Frankel has a typically cogent analysis of the issues:

Noble’s ruling is a direct descendant of then Chancellor William Chandler‘s 2009 opinion in In re John Q. Hammons Hotels Shareholder Litigation, in which Chandler said that the board of Hammons, a company controlled by founder John Hammons, could have adopted procedures in its sale to a third party that would have entitled it to deference under the business judgment rule, but didn’t. Chandler spelled out the protections for minority shareholders that the Hammons board could have applied, and SRA apparently heeded them. Noble said SRA passed the test Chandler set forth in the Hammons ruling.

Among the key corporate and commercial Delaware decisions that we have highlighted on these pages during the first five months of 2013, the following decisions either clarified existing Delaware law or announced new law on important substantive or procedural topics. This is a supplement to the annual review of cases we have provided on this blog for the last eight years. Other cases decided so far in 2013 may have been the subject of more commentary elsewhere, but we think that among the 80 or so cases we have reviewed from January through May of 2013, those listed below have the most wide-ranging importance and relevance.

The list was intentionally kept relatively short, which increased the risk of omitting some opinions that also are noteworthy, so we encourage readers to send us suggestions for additions to this list. Hyperlinks below lead to both a synopsis and each slip opinion.

Supreme Court Determines that There is No Fiduciary Duty to Structure Executive Compensation to Take Advantage of Corporate Tax Deduction (Freedman v. Adams). This decision is another example of how difficult it remains to challenge compensation decisions on the basis of Delaware corporate law.

Supreme Court Enforces Duty to Negotiate in Good Faith (SIGA Technologies v. PharmAthene). Most lawyers will be surprised to know that an obligation to negotiate can be enforced in Delaware even when a term sheet is not complete or final.

Supreme Court Upholds Presumption of Good Faith in Agreement to Bar Claims (Norton v. K-Sea Transportation). This is one of many recent examples where an LP agreement waived all duties except the non-waivable implied duty of good faith, but the agreement also created a presumption of good faith that made it almost impossible to challenge wrongdoing. N.B. Waivers will be enforced. Read before signing to know what duties and rights are being waived.

Chancery Clarifies Fiduciary Duty of Disclosure Owed by Directors and Majority Shareholders when Purchasing Shares or Selling Shares to Existing Shareholders (In re: Wayport, Inc. Litigation). This opinion provides a textbook-style explanation of the duty of disclosure in general, as well as in the context of selling and buying shares among existing shareholders.

Supreme Court Establishes New Standard for Trial Courts to Determine Appropriate Penalty when Pretrial Deadlines are Not Met (Christian v. Counseling Resource Associates, Inc.). This is a must-read for lawyers (and their clients) to understand when court approval is needed to extend pre-trial deadlines and the consequences of missing pre-trial filing deadlines.

Chancery Emphasizes Duty of Oversight Owed by Directors Includes Corporate Operations in Foreign Countries (Rich v. Chong and Puda Coal and In re:  China Agritech, Inc. Shareholder Derivative Litigation). This trio of decisions, all involving operations in China of Delaware corporations, should worry directors of companies with far-flung operations in distant countries unless they make visits to those countries or otherwise make themselves sufficiently aware of those operations.

Business Judgement Rule Announced as Standard Applicable to Controlling Shareholder Transactions with Safeguards (In Re MFW Shareholders Litigation). This iconic Chancery decision provides a clear standard to practitioners who formerly had less definitive guidance (and multiple conflicting standards) to advise clients on the standard that would apply in Delaware to controlling shareholder freezeouts.

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.]

Practitioner’s Aside

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: 

The other day, I mentioned Delaware Chancellor Leo Strine’s recent opinion in In re MFW Shareholders Litigation. Alison Frankel has a great column on the case, in which she explains that:

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.

She concludes:

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.