M&A Update: Delaware Supreme Court Upholds Business Judgment Rule Review For Certain Controlling Stockholder Transactions With Dual Minority Protections

by Cadwalader, Wickersham & Taft LLP

On March 14, 2014, the Delaware Supreme Court upheld the Court of Chancery’s 2013 decision in In re MFW Shareholders Litigation, holding that in going-private mergers where there is a controlling stockholder, the use of both a truly independent special committee and a majority of the minority stockholder vote, allows for judicial review under the deferential business judgment standard. 


In mid-2011, Ronald Perelman’s wholly-owned holding company, MacAndrews & Forbes, a 43% stockholder of M&F Worldwide (MFW), made a proposal to take MFW private by acquiring the minority shares at $24 per share.  In its initial proposal, MacAndrews & Forbes indicated that it “would not move forward” without approval from both an independent special committee and a majority of MFW’s unaffiliated minority stockholders, and that it had no interest in selling to a third party bidder.  In response to this proposal, the MFW board formed a special committee consisting solely of independent directors.  The special committee ultimately recommended that the board approve and the minority stockholders accept a deal that paid $25 per share, and 65% of the non-controlling stockholders thereafter voted in favor of the transaction.

After closing, MFW stockholders sued MFW, Perelman, and several MFW directors for damages based on allegations of breach of fiduciary duty.  On May 29, 2013, the Delaware Chancery Court granted summary judgment in favor of defendants.  Significantly, in doing so, then-Chancellor (now Chief Judge) Strine determined that the transaction was subject to deferential review under the business judgment rule notwithstanding that controlling stockholder transactions typically are subject to the more rigorous entire fairness standard. The Delaware Supreme Court affirmed both the reasoning employed and outcome reached by the lower court. 


The Supreme Court opinion confirms the availability of a procedural option for controlling stockholders to use in Delaware for structuring controlling stockholder merger transactions to obtain the benefit of deferential review of the transaction under the business judgment rule.  Adopting the MFW “dual minority protection” structure, however, also entails downsides, risks and costs, which need to be evaluated given the specific facts of each transaction.

  1. Special Committee Independence and Empowerment. Much of the Court’s factual analysis focused on whether the committee was independent and sufficiently empowered. While the Court applied well-settled Delaware law in determining that the special committee was independent, rejecting typically used arguments about the directors’ personal and professional relationships with the controlling stockholder, it elaborated on when a committee is sufficiently empowered.  Importantly, to the Court, the committee had authority to retain independent advisors, negotiate transaction terms and say no to the controlling stockholder.  The Court appeared to discount the fact that the committee did not have authority “to say yes” to a third party offer (or pursue other strategic options) on the ground that MacAndrews & Forbes indicated at the outset its unwillingness to sell and it had no duty to do so, which effectively precluded a third party acquisition.  The Court noted, however, that the committee, with the help of its financial advisor, did consider, as part of its analysis of whether to accept or reject the proposed buy out,  whether there were other potential buyers and what other options were available that might generate more value than the MFW proposal. Where a controlling stockholder’s holdings do not amount to a veto right over an acquisition by a third party or where the controlling stockholder does not clearly state at the outset that it is unwilling to sell to a third party, consideration should be given to empowering the committee to pursue other transactions and “say yes” to a third party proposal.
  2. Conduct of Committee.  The Court also found that the committee did its work properly.  The Court cited evidence that the committee met eight times; “screened off” MacAndrews & Forbes employees from the committee’s process; had up-to-date projections prepared by MFW’s business segments (which reflected deteriorating results); actively negotiated price and obtained another $1 per share; investigated the possibility of other buyers notwithstanding MacAndrews & Forbes’ stated unwillingness to sell; and obtained an opinion from its financial advisor that the transaction was fair and within the range of value estimated for the minority stock.  Ultimately, this holding is consistent with Delaware’s general respect for the informed decisions of impartial directors.  However, as this and other recent cases make clear, courts will carefully review the committee’s actual conduct and decision-making.  If the court concludes that directors are not fully informed or sufficiently proactive in obtaining the best available deal for stockholders, the court will not show deference to the committee’s decisions.
  3. Minority Vote.  The Court concluded (and plaintiffs did not contest) that the minority stockholders voting to approve the transaction were fully informed and uncoerced.  The Court observed that the proxy statement accurately disclosed the committee’s work and negotiation efforts, information about the projections prepared by management, and five separate price ranges for the value of MFW stock generated by the committee’s financial advisor and supporting its fairness opinion.  Again, however, it is not enough just to obtain the requisite percentage of minority votes.  MFW and other recent decisions are clear that courts will not give weight to stockholder votes that are procured by misleading or incomplete information in the proxy statement. 
  4. Timing.  As did the lower court, the Delaware Supreme Court emphasized that the controlling stockholder made clear in its initial proposal and before commencing negotiations that it would only proceed upon receiving approval of an independent special committee and a majority vote of minority stockholders.  In controlling stockholder situations, prospective acquirers and the board both must be cognizant that this timing is quite important.  If the controlling stockholder is willing to agree to these conditions, it should do so at the outset in order to maximize the possibility of deferential business judgment review of the resulting transaction.  Alternatively, the board should insist on and obtain the controlling stockholder’s consent to these conditions before engaging with the controlling stockholder and commencing negotiations.  
  5. Execution Risks. There are practical disadvantages to following the “dual protection”  approach. For example, a non-waivable majority-of-the-minority provision can present execution risks that could prevent the deal from receiving stockholder approval.  Dell’s recent going-private transaction encountered this problem.  Dell initially conditioned the transaction on approval from a special committee and a majority of outstanding minority shares.  As voting proceeded, however, it became apparent that approval of a majority of the outstanding minority shares would not be obtained.  The controlling stockholder ultimately increased its price in exchange for loosening the minority vote condition such that it would be approved so long as a majority of minority shares actually voted were in favor.  While amending the transaction approval terms in this way could have potentially foreclosed business judgment review,  it enabled the deal to proceed.  Under the unique facts of the Dell transaction, the court was not troubled by this change; however, the outcome in Dell may not serve as a precedent in other transactions.  Accordingly,  potential acquirers, directors and their advisors need to weigh the importance of obtaining a favorable after-the-fact standard of review against offering veto power over the transaction to minority stockholders.
  6. Need To Go Through Discovery.  The Court explained that it may still be difficult to obtain dismissal of a plaintiff’s complaint challenging a going-private transaction without discovery to determine if the transaction meets the MFW criteria.  The Court observed that the complaint in this case would have survived a motion to dismiss because it pled “a reasonably conceivable set of facts” calling into question the sufficiency of the price offered and thus the committee’s negotiations.  Therefore, companies and their controlling stockholders may have to go through potentially protracted and costly discovery on whether the MFW criteria are met, as well as on the merits, in order to prevail pre-trial at the summary judgment stage.  If triable factual issues remain after discovery and summary judgment about whether “either or both of the dual procedural protections were established” or were effective, then the case will be tried and the transaction will be subject to entire fairness review.

For a copy of the full opinion, click here.

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.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.