In a decision with great potential significance for the structuring of going-private transactions, Delaware Chancellor Leo Strine recently held in In re MFW Shareholders Litigation that a merger with a controlling stockholder would be reviewed under the highly deferential business judgment rule rather than the “entire fairness” standard if the merger is structured to include certain procedural safeguards for minority shareholders.
The Business Judgment Rule and the Entire Fairness Standard -
As the Delaware Supreme Court has recognized, in litigation challenging board action, “[t] he choice of the applicable ‘test’ to judge director action often determines the outcome of the case.” Most board action — including a decision to approve a third-party merger offer — is reviewed under the business judgment rule, which precludes the court from inquiring into the fundamental fairness of the deal. Under that rule, the court must dismiss any challenge to a corporate transaction unless the terms were so disparate than no rational person in good faith could have thought the transaction was fair.
Originally published in Law360 on August 22, 2013.
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