In re MFW S'holders Litig., C.A. No. 6566-CS (Del. Ch. May 29, 2013) (Strine, C.)

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In this decision, the Court of Chancery addressed a novel question of law:  Whether the business judgment or the entire fairness standard of review should apply to a merger between a controlling stockholder and its subsidiary when the merger is conditioned on the approval of both an independent committee and a majority of the minority stockholders.  The Court held that the business judgment standard of review will apply where (i) the controlling stockholder, from the outset, indicates it will not proceed without both protections; (ii) the committee is independent; (iii) the committee has the authority to choose its own advisors and to say no definitively; (iv) the committee meets it duty of care; (v) the vote of the minority stockholders is informed; and (vi) the minority stockholders are not coerced.  In so holding, the Court determined that language in prior Delaware Supreme Court decisions, which could be read as requiring entire fairness review whenever a controlling stockholder engages in a transaction with its subsidiary, is dicta because no Delaware court has been presented with the question of which standard of review applies when both procedural protections are in place.  The Court held that, on the facts presented in this case, the business judgment standard would apply and granted defendants’ motion for summary judgment with respect to claims for breach of fiduciary duty.

MacAndrews & Forbes, a holding company solely owned by Ron Perelman, owned 43% of M&F Worldwide (“MFW”).  MacAndrews & Forbes offered to purchase the remaining equity of MFW in a going private merger.  In its initial letter of intent, MacAndrews & Forbes said it would not proceed with any going private transaction unless it was approved by both an independent committee of MFW and by a vote of the majority of MFW’s stockholders who were not affiliated with MacAndrews & Forbes.  The MFW board of directors established a special committee, which negotiated with MacAndrews & Forbes, achieved an increase in the offer price, and approved the going private merger.  Plaintiffs, stockholders of MFW, brought suit and claimed MacAndrews & Forbes and the directors of MFW had breached their fiduciary duties in connection with the merger.  The defendants brought a motion for summary judgment and argued that, because the merger had been conditioned on the approval of the special committee and the disinterested stockholders, the business judgment standard of review should apply.

The Court of Chancery first examined the special committee’s process.  The Court found no dispute that the committee members had hired independent legal and financial advisors or that the committee members were fully empowered to negotiate with the controlling stockholder and to decline to enter into any transaction.  The Court further found that the committee members had satisfied their duty of care by meeting frequently to discuss the merger and by considering available financial information to determine whether MFW had viable options other than the merger and whether the merger was in the best interest of the minority stockholders of MFW.

The Court then addressed plaintiffs’ allegations that three of the four committee members were not independent by virtue of various business and social relationships between such members and MacAndrews & Forbes.  The Court determined that, because the plaintiffs failed to proffer evidence of the financial circumstances of the committee members whose independence they challenged, there was no triable issue of fact with respect to their independence.  Noting that MFW’s shares were listed on the New York Stock Exchange, the Court referred to the Exchange’s factors governing director independence in making its decision.  The Court emphasized that it was not bound by such factors, but stated that they provided useful guidance.  The Court concluded that, as a matter of law, the committee members were independent.

After finding that no triable issue of fact with respect to the committee’s composition and process, the Court of Chancery examined the vote of the disinterested stockholders of MFW.  Because the plaintiffs did not allege any disclosure failures or coercion, the Court determined that there was no factual dispute that a majority of the minority stockholders voted in favor of the merger upon full information and without being coerced.  The Court concluded that, had the merger not involved a controlling stockholder, the business judgment rule would apply.  In that event, the Court noted that all claims must be dismissed unless no rational person could have believed the merger was favorable to MFW’s minority stockholders.  The merger consideration represented a 47% premium to the closing price of MFW’s shares before the offer was made.  Also, the committee’s financial advisor opined as to the fairness of the merger consideration using various analyses, including a DCF analysis, and a majority of the disinterested stockholders approved the merger.  For these reasons, the Court held that the merger did not constitute waste and, therefore, would satisfy the business judgment standard if applied.

The Court of Chancery determined that no Delaware court has been presented with the question whether the use of both an independent committee and approval by a majority of disinterested stockholders would result in the application of the business judgment standard of review.  The Court acknowledged that language in Delaware Supreme Court decisions, such as Kahn v. Lynch  Commc’n Sys. (“Lynch I”), 638 A.2d 1110 (Del. 1994), Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997), and In re Southern Peru Copper Corp., 52 A.3d 761 (Del. Ch. 2011), aff’d sub nom. Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012), has been read to support the proposition that any merger with a controlling stockholder will be subject to the entire fairness standard of review.  The Court of Chancery distinguished these cases on their facts. 

In Lynch I, the controlling stockholder threatened to approach the stockholders with a hostile tender offer at a lower price if the special committee did not approve its offer.  Moreover, the Court of Chancery noted that the transaction in Lynch I was conditioned only on the approval of the committee and not on the approval of the unaffiliated stockholders.  Similarly, the transaction in Tremont also was not conditioned on the approval of the minority stockholders.  In addition, the court in Tremont questioned the independence of the committee.  In Southern Peru, the Supreme Court did not determine which standard applied because the parties had agreed that entire fairness was the appropriate standard of review.  Thus, the Court of Chancery determined that any broad language suggesting that entire fairness is the only standard of review for a transaction involving a controlling stockholder is dicta and, therefore, has no precedential effect.

In deciding to apply the business judgment standard, the Court of Chancery gave considerable weight to the public policy of Delaware corporate law to defer to informed decisions of impartial directors and to protect minority stockholders.  The Court found that Delaware’s strong public policy interest in the fair treatment of minority stockholders would best be served by a standard of review that encourages a process that protects such stockholders.  The Court stated that adopting the business judgment standard of review where both an independent committee and a vote of disinterested stockholders are properly used would benefit minority stockholders because it would give controlling stockholders an incentive to agree to the use of both procedural protections, resulting in the replication of an arm’s-length process.   The Court also noted a lack of evidence that the application of the entire fairness standard in cases where both procedural protections were utilized added any real value for minority stockholders, given that, when the more exacting standard of review is adopted, there is no practical way to have the case dismissed at the pleading stage.  For these reasons, the Court held that the business judgment standard of review would apply and granted defendants’ motion for summary judgment.