The Latest Word On Freeze-Outs In Delaware: In Re CNX Gas Corporation Shareholders Litigation


Since the Delaware Chancery Court’s 2001 ruling in In re Siliconix,1 the Delaware courts have applied different standards of legal review to acquisitions of a target company by a controlling stockholder2 (commonly known as “freeze-outs”) based on how the transaction is structured. Those structured as one-step freeze-out mergers are subject to review under an entire fairness standard. But freeze-outs that are structured as a tender offer followed by a short-form merger (or a “two-step transaction”) will be evaluated under the more deferential business judgment rule standard, if they comply with a number of judicially imposed requirements elucidated in Siliconix and expanded in a series of subsequent cases.

The uneasy distinction between one-step and two-step freeze-outs grew more uncomfortable with the Delaware Chancery Court’s May 25, 2010 ruling in In re CNX Gas Corporation Shareholders Litigation.3 In CNX, Vice Chancellor Laster, the newest member of the Chancery Court, ruled that entire fairness was the appropriate standard for review of a two-step freeze-out by CONSOL Energy, the controlling stockholder of CNX, of the minority stockholders in CNX. However, Vice Chancellor Laster declined to issue a preliminary injunction against completion of CONSOL’s first-step tender offer, finding that any harm to the plaintiffs could be remedied in a post-closing damages action. Vice Chancellor Laster’s opinion endorses what he refers to as “the unified standard for reviewing controlling stockholder freeze-outs” previously proposed by Vice Chancellor Strine in In re Cox Communications4 and urges the Delaware Supreme Court to resolve the “fundamental issues of Delaware law and public policy” raised by the disparate legal standards applied to one-step and two-step freeze-outs.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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