On May 29, 2013, the Delaware Court of Chancery held in In re MFW Shareholders Litigation that a going-private merger with a controlling stockholder will be subject to the deferential business judgment rule, rather than the exacting entire fairness standard of review, if the merger is conditioned upfront on approval by both a “properly empowered, independent committee” and a non-waivable, informed, uncoerced majority-of-the-minority vote.
The case concerns the going-private merger of M&F Worldwide (MFW) with its 43-percent stockholder, MacAndrews & Forbes, a holding company solely owned by Ronald Perelman. MacAndrews & Forbes offered to purchase the remainder of MFW for $24 per share and, at the outset, stated that it would not proceed with a transaction that was not approved by both an independent special committee and a majority-of-the-minority vote. It also explicitly promised upfront not to bypass the special committee by making a tender offer directly to the stockholders.
A four-member special committee was formed and engaged its own legal and financial advisors. Through negotiations conducted over three months, the special committee convinced MacAndrews & Forbes to raise its offer to $25 per share, after which the special committee recommended in favor of the merger. Ultimately, 65 percent of MFW’s minority stockholders voted in favor of the merger. However, plaintiff stockholders challenged the merger under the entire fairness standard.
The Court of Chancery’s Decision
Under well-established Delaware precedent, transactions with controlling stockholders, as an initial matter, are subject to entire fairness review, which requires courts to substantively review the transaction and determine whether the price and process were fair to the minority stockholders.1 Earlier Delaware decisions have held that conditioning a merger with a controlling stockholder on approval by a properly empowered committee of independent directors or a non-waivable, informed, and uncoerced majority-of-the-minority vote shifts the burden of proof in an entire fairness case to the plaintiffs, but still requires judicial review of the fairness of the transaction. Although these decisions suggested that entire fairness would remain the applicable standard even where both protections were used,2 none of the earlier cases directly addressed the issue. With the question squarely presented for the first time, the court held that business judgment was the appropriate standard of review in a controlling stockholder merger when both devices are properly employed.
In ruling that the business judgment standard of review applies, the court explained that adopting such a rule of law would incentivize controlling stockholders to agree to both procedural protections and thereby provide minority stockholders with the “best protection”—a special committee to act as an independent “bargaining agent” and the opportunity to reject the transaction. This, the court reasoned, would render a merger with a controlling stockholder “analogous to that of a third party merger."
The court held that the business judgment rule will apply to a merger with a controlling stockholder when the following sets of conditions are met: (1) the controller must, at the outset, condition the procession of the transaction on both procedural protections; (2) the special committee must be independent, free to select its own advisors, and fully empowered to say “no” to the transaction, and the committee must satisfy its fiduciary duty of care; and (3) the vote of the minority must be non-waivable, informed, and uncoerced.
Finding that the plaintiffs had shown no factual issue concerning the satisfaction of these conditions, the court granted summary judgment to the defendants.
This decision finally addresses the critical question of the appropriate standard of review in connection with a controlling stockholder merger that is expressly conditioned on the approval of both a properly empowered special committee and a non-waivable, fully informed, and uncoerced vote of the majority of the minority.3 Although the Delaware Supreme Court has yet to speak on the issue and the MFW decision is likely to be appealed, the Court of Chancery's decision provides important guidance for structuring acquisitions by controlling stockholders. In particular, this ruling makes clear that the threat of years of litigation for such a transaction can be avoided so long as that transaction is structured in the manner prescribed by the court. Given the significant growth in deal litigation in recent years, this standard offers the opportunity to avoid many of the transaction costs and litigation risks that have long been part of the planning process for an acquisition by a controlling stockholder. If affirmed on appeal, giving business judgment review to these types of transactions raises the possibility of significantly reducing deal litigation in an area where it has traditionally been most common.
For further information on the decision or any related matter, please contact a member of Wilson Sonsini Goodrich & Rosati's corporate law and governance practice or securities litigation department.