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Chancellor Strine Creates Path for Business Judgment Rule Review of Controlling Stockholder-Led Buyouts

By Robert S. Reder

Dealmakers and their legal advisers have an important choice to make when structuring a controlling stockholder-led buyout. The first alternative is a long-form merger of the controlled corporation, requiring both controlled company board approval and a positive vote of stockholders (a “one-step transaction“). Under the second alternative, the controlling stockholder launches a tender offer for the controlled corporation's publicly held shares which, if successful in bringing the controlling stockholder's ownership level to at least 90%, is followed by a short-from merger in which the approval of neither the board nor the stockholders of the controlled corporation is required (a “two-step transaction“). The larger the percentage ownership of the controlling stockholder, the more likely it is to choose the two-step approach. The Delaware courts traditionally have applied quite different standards of review to these two transactions.

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