[Editor’s Note: The following post is authored by Davis Polk & Wardwell LLP]
In a recent, landmark Delaware decision in In re MFW Shareholders Litigation, C.A. No. 6566-CS (Del. Ch. May 29, 2013), Chancellor Leo E. Strine, Jr. answered a frequently debated (but unresolved) question of whether a going-private merger with a controlling stockholder could be structured to invoke the business judgment rule, and not the entire fairness standard of review. Resolving this issue of first impression, the Court held that the business judgment rule will apply “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.”
For the past two decades, since the Delaware Supreme Court’s 1994 decision in Kahn v. Lynch, it has been well settled that negotiated mergers with controlling stockholders generally are subject to entire fairness review, but that defendants are entitled to shift to plaintiffs the burden of proof if the transaction is either negotiated by a special committee or conditioned on the approval of a majority of the minority stockholders. Whether Kahn or its progeny compelled the application of entire fairness review—as opposed to the protection of the business judgment rule—to a transaction that employed both procedural devices was a matter of great debate in the M&A bar.
The MFW litigation arose out of a June 2011 proposal by MacAndrews & Forbes Holdings Inc. to acquire M&F Worldwide (of which MacAndrews owned 43% of the outstanding stock). MacAndrews initially proposed to acquire MFW for $24.00 per share and stated, at the outset, that its proposal was subject to (i) a non-waivable majority-of-the-minority condition and (ii) approval by a special committee. The MFW board formed and empowered a special committee of independent directors to negotiate with MacAndrews and/or reject the proposal. The special committee negotiated and recommended a transaction at $25.00 per share, subject to approval by a majority of the minority. Sixty-five percent of the shares not owned by MacAndrews voted to approve the merger. MFW stockholders sued, alleging that the merger was not entirely fair, and sought post-closing damages for breach of fiduciary duty. The defendants moved for summary judgment, arguing that the business judgment rule should apply.
Chancellor Strine first evaluated the adequacy of the protective devices employed, finding that the factual record confirmed that (i) the special committee was composed of independent directors adequately empowered to evaluate, negotiate and reject the transaction; and (ii) a fully informed, uncoerced majority of MFW’s minority stockholders voted to approve the transaction. Notably, Chancellor Strine did not review the “effectiveness” of the special committee, stating that “[f]or a court to determine whether a special committee was effective in obtaining a good economic outcome involves the sort of second- guessing that the business judgment rule precludes.”
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