DE Supreme Court Affirms Chancery Court Application of Business Judgment Review to Control Stockholder Buyout

Over a decade later, in In re Cox Communications, Inc. Shareholders Litigation, 879 A.2d 604 (Del. Ch. 2005), then-Vice Chancellor Strine promoted, in a footnote to his opinion, adoption of a “unified standard for reviewing control stockholder freeze-outs ' .” Under this formulation, appropriate use of a special committee of independent directors and a majority-of-the-minority stockholder vote would trigger presumptive application of “the business judgment standard of review ' .” However, “if the transaction does not incorporate both protective devices, or if a plaintiff can plead particularized facts sufficient to raise a litigable question about the effectiveness of one of the devices, then the transaction is subject to entire fairness review.”

Then, in 2010, Vice Chancellor J. Travis Laster went one step further by applying the unified standard in a control stockholder buyout. Because both protective devices had not been utilized by the control stockholder, the Vice Chancellor subjected the buyout to an entire fairness review. In so ruling, the Vice Chancellor recognized that his promotion of the unified standard in a control stockholder buyout could not become a permanent part of the fabric of Delaware corporate law until blessed by the Delaware Supreme Court.

Finally, on May 29, 2013, in In re MFW Shareholders Litigation, C.A. No. 6566-CS (Del. Ch. May 29, 2013), then-Chancellor Strine surprised many commentators by accepting a control stockholders' argument that the business judgment rule could, under the right circumstances, apply to a buyout by that control stockholder. In the Chancellor's view, the control stockholder had done everything right by conditioning the transaction, from the very beginning , on both independent board committee approval and a majority-of-the minority vote, thus entitling it to summary judgment in its favor. Recently, the Delaware Supreme Court affirmed the Chancellor's ruling in Kahn v. M&F Worldwide Corp., No. 334, 2013 (Del. March 14, 2014), but with a twist that may diminish the impact of what the Chancellor sought to achieve.

MacAndrews & Forbes' Buyout of MFW

In May 2011, MacAndrews & Forbes Holdings, Inc., the well-known holding company which, famously, also controls cosmetics giant Revlon, began to explore the acquisition of the publicly held shares of M&F Worldwide (MFW). At the time, MacAndrews & Forbes owned 43.4% of MFW, whose “stock price traded in the $20 to $24 per share range.”

When MFW stock closed at $16.96 on June 10, MacAndrews & Forbes opportunistically presented the MFW board with a letter offering to purchase the publicly held shares for $24 per share in cash. MacAndrews & Forbes specified that it would not proceed with the buyout unless approved by both a special committee of independent MFW directors and a majority-of-the-minority vote. The proposal also explained that while MacAndrews & Forbes had “no interest in selling” its MFW stake, a decision by either the special committee or the public stockholders not to approve the transaction “would not adversely affect our future relationship with the Company and we would intend to remain as a long-term stockholder.” Notably, this was exactly opposite of the approach of the control stockholder in Kahn v. Lynch, who threatened a hostile takeover if the target board rejected its offer.

The next day, the MFW board established a special committee of independent directors. The special committee in turn retained independent counsel and a financial adviser. The committee's charge was relatively broad, giving it the right not only to investigate, evaluate and negotiate MacAndrews & Forbes' offer, but also to “determine to elect not to pursue the Proposal ' .” The board also stipulated that it would not approve the transaction “without a prior favorable recommendation of the Special Committee ' .” However, presumably because MacAndrews & Forbes had indicated that it would not support an alternative transaction, the committee was not expressly given the right to seek another buyer or an alternative transaction.

After obtaining updated management projections, the special committee's financial adviser applied traditional methodologies to arrive at a valuation range for MFW of $15 to $45 per share. Despite MacAndrews & Forbes' position that it was a buyer but not a seller, the committee did seek its financial adviser's “advice about strategic alternatives, including values that might be available if MacAndrews was willing to sell.” Based on this advice, the committee's “analysis of those alternatives proved that they were unlikely to achieve added value for MFW's stockholders.”

Next, even though MacAndrews & Forbes' $24 offer fell within its adviser's valuation range, the committee “countered at $30 per share.” The committee recognized that this was “a very aggressive counteroffer,” particularly in light of negative “developments in both MFW's business and the broader United States economy ' .” Thus, when MacAndrews & Forbes made its “best and final” offer of $25, the committee “unanimously approved and agreed to recommend the Merger.” At the stockholders meeting that followed, the transaction “was approved by a vote of 65.4% of MFW's minority stockholders.”

The Court of Chancery Grants Summary Judgment

Despite the favorable vote of MFW's minority stockholders, the inevitable stockholder lawsuit against MacAndrews & Forbes, among others, “seeking post-closing relief ' for breach of fiduciary duty” proceeded in the Court of Chancery. After plaintiff stockholders “were provided with extensive discovery” over a period of 18 months, MacAndrews & Forbes sought and was granted summary judgment. In so ruling, Chancellor Strine applied the business judgment standard of review rather than the more intrusive entire fairness test. The Chancellor came to this decision on the basis of the dual protections afforded by MacAndrews & Forbes to MFW's minority stockholders from the outset of the transaction, as well as his conclusion, based on the record before him, that: 1) the special committee was duly established and empowered and acted with due care; and 2) the majority-of-the-minority stockholder vote was “fully informed and uncoerced.”

Among the reasons cited by Chancellor Strine for his adoption of the dual approval standard as a means of obtaining a business judgment standard of review was that, in his view, application of business judgment would equate to earlier dismissals of litigation over control stockholder buyouts. Under the Kahn v. Lynch approach, “absent the ability of defendants to bring an effective motion to dismiss, every case has settlement value, not for merits reasons, but because the costs of paying ' attorneys' fees to settle litigation and obtain a release without having to pay the minority stockholders in excess of the price agreed to by the special committee” are less than the costs inherent in a time-consuming trial on the merits to establish entire fairness. Chancellor Strine hoped that making a business judgment standard of review available in exchange for greater minority stockholder protections would provide control stockholders with a means to prevail on an early motion to dismiss.

The Supreme Court's Analysis

Plaintiff stockholders appealed the Chancellor's ruling to the Delaware Supreme Court. Quoting extensively from Chancellor Strine's opinion, and agreeing with his conclusion that “[t]his appeal represents a question of first impression,” the court affirmed the Chancellor's ruling granting summary judgment to MacAndrews & Forbes.

Applicability of the Business Judgment Rule

In response to this novel question, the Supreme Court, in a unanimous en banc ruling, proclaimed that “in controller buyouts, the business judgment standard of review will be applied if and only if:

1. the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders;
2. the Special Committee is independent;
3. the Special Committee is empowered to freely select its own advisers and to say no definitively;
4. the Special Committee meets its duty of care in negotiating a fair price;
5. the vote of the minority is informed; and
6. there is no coercion of the minority.”

Significantly, in explaining its reasons for adopting this new standard, the Supreme Court did not cite Chancellor Strine's hope that extension of business judgment review to control stockholder buyouts would result in early dismissal of the related stockholder litigation. To the contrary, the Supreme Court's formulation of the new standard would seem to imply that it will in fact be difficult for a defendant to win a motion to dismiss. Specifically, “[i]f a plaintiff can plead a reasonably conceivable set of facts showing that” any elements of the new standard were not satisfied, “that complaint would state a claim for relief that would entitle the plaintiff to proceed and conduct discovery.” Further, “[i]f, after discovery, triable issues fact remain ', the case will proceed to a trial in which the court will conduct an entire fairness review.” [emphasis added]. In other words, “unless both procedural protections for the minority stockholders are established prior to trial, the ultimate judicial scrutiny of controller buyouts will continue to be the entire fairness standard of review.”

This approach was emphasized in two footnotes included by the Supreme Court in its opinion.

In the first footnote, the Supreme Court cited to a lengthy discussion in its Americas Mining opinion to the effect that “it was not possible to make a pretrial determination that the independent committee had negotiated a fair price.” In fact, the Supreme Court stated in that opinion that “the burden shifting inquiry requires 'a look back at the substance, and efficacy, of the special committee's negotiations, rather than just a look at the composition and mandate of the special committee.'” As a result, “absent unique circumstances ', the burden shift will rarely be determinable on the basis of the pretrial record alone.” Consistent with the view expressed in Americas Mining, it would seem that the Supreme Court does not expect that control stockholders generally will be able to achieve early dismissal of stockholder litigation.

In the second footnote, the Supreme Court went on to indicate that the plaintiff MFW stockholders' original complaint “would have survived a motion to dismiss under this new standard.” In the Supreme Court's view, the complaint alleged with sufficient particularity that: 1) the valuation ratios applicable to the MacAndrews & Forbes buyout price were “'well below' those calculated for recent similar transactions”; 2) such price was “two dollars per share lower than the trading price only about two months earlier”; 3) “MWF's share price was depressed ' due to short-term factors”; and 4) “commentators viewed both [the] initial $24 per share offer and the final $25 per share Merger price as being surprisingly low.” These factors “call into question the adequacy of the Special Committee's negotiations, thereby necessitating discovery on all of the new prerequisites to the application of the business judgment rule.”

Although MacAndrews & Forbes ultimately obtained summary judgment, that did not occur until after 18 months of discovery. Only time will tell whether the Court of Chancery will demand a similar level of discovery in future litigation over control stockholder buyouts in which the dual protections are employed. If so, Chancellor Strine's hoped-for early dismissal of this type of litigation may not be realized.

Satisfaction of the Dual Standard

Emphasizing the “highly extensive record” before it, the Supreme Court turned next to an examination of whether the various elements necessary to achieve business judgment rule review had been established by MacAndrews & Forbes. The factors emphasized by the Supreme Court should prove useful to M&A planners in processing future control stockholder buyout transactions:

The special committee was “independent,” despite various business and social ties between committee members and affiliates of MacAndrew & Forbes. According to the Supreme Court, a plaintiff seeking to question a director's independence “must demonstrate that the director is 'beholden' to the controlling party 'or so under [the controller's] influence that [the director's] discretion would be sterilized.” Any ties must be ” material , in the sense that the alleged ties could have affected the impartiality of the individual director.” In other words, “[b]are allegations that directors are friendly with, travel in the same social circles as, or have past business relationships with the proponent of a transaction ' are not enough to rebut the presumption of independence.”

The special committee was “empowered,” even though “it did not have the authority, as a practical matter, to sell MFW to other buyers” due to MacAndrews & Forbes “announcement that it was not interested in selling its 43% stake.” This factor was outweighed by the fact that the special committee “was empowered not simply to 'evaluate' the offer ' but to negotiate with [M&F] over the terms of its offer to buy out the noncontrolling stockholders.” Further, “[t]his negotiating power was accompanied by the clear authority to say no definitively,” and bolstered by MacAndrews & Forbes' promise “that it would not proceed with any going private proposal that did not have the support of the Special Committee.” Also, the special committee did have “the leeway to get advice from its financial advisor about the strategic options available,” and it in fact acted upon this opportunity to “consider whether there were other buyers who might be interested in purchasing MFW, and whether there were other strategic options, such as asset divestitures, that might generate more value for minority stockholders '.”

The special committee “exercised due care” by, among other things, ensuring “that the process replicated arm's-length negotiations with a third party”; meeting “frequently” and reviewing “a rich body of financial information relevant to whether and at what price a going private transaction was advisable”; obtaining “new projections that reflected management's most up-to-date, and presumably most accurate, thinking”; having its financial adviser “conduct additional analyses and explore strategic alternatives”; and negotiating an increase in MacAndrews & Forbes initial offer for a price that “fell within the range of values produced by each of [its financial advisor's] valuation techniques” and was declared to be “fair” in the financial adviser's opinion.

The majority-of-the-minority stock- holder vote was “fully informed and uncoerced.” In particular, the Supreme Court applauded the proxy statement disclosure furnished to MFW stockholders, including the presentation of “the history of the Special Committee's work” as well as “five separate ranges for the value of MFW's stock” prepared by the special committee's financial adviser.

Conclusion

The Delaware Supreme Court's affirmance of then-Chancellor Strine's MFW ruling establishes that a one-step control stockholder buyout may receive a business judgment level of review, rather than a traditional entire fairness analysis, if the dual minority stockholder protections ' approval by an independent, fully empowered special board committee that functions in accordance with its duty of care and an uncoerced, fully-informed majority-of-the-minority stockholder vote ' are offered by the control stockholder from the outset. However, it remains to be seen whether M&A deal planners will find the procedural benefits of this new standard attractive enough to outweigh the potential risks of placing approval of a transaction in the hands of what have already become newly empowered and increasingly aggressive minority stockholders.

In making this determination, M&A deal planners will need to assess, among other things, whether they stand a better chance of obtaining an early dismissal of plaintiffs' claims by taking advantage of the Supreme Court's ruling. Significantly, the Supreme Court's position that an extensive record is required to establish that a special independent committee was not only properly established and empowered, but in fact exercised its power consistent with its fiduciary duty of care ' as stated in Americas Mining and reiterated in Kahn v. M&F Worldwide Corp. ' would seem to indicate that then-Chancellor Strine's vision of early dismissal of control stockholder buyout litigation through use of the dual minority stockholder protections may not be realized. If 18 months of discovery preceding a hearing on a summary judgment motion, or even a full trial on the merits, is required regardless of whether both protections are extended to minority stockholders, then deal planners might be content to continue the status quo of special board committee approval without a majority-of-the-minority stockholder vote.

Robert S. Reder, Professor of the Practice of Law at Vanderbilt Law School, has been serving as a consulting attorney at Milbank, Tweed, Hadley & McCloy LLP in New York City since his retirement as a partner in April 2011. Mr. Reder is a member of this Newsletter's Board of Editors.

Following then-Vice Chancellor (now Chief Justice of the Delaware Supreme Court ) Leo E. Strine, Jr.'s May 29, 2013 decision in In re MFW Shareholders Litigation, C.A. No. 6566-CS (Del. Ch. May 29, 2013), dealmakers and their legal advisers had an important choice to make when structuring a control stockholder buyout of a publicly traded corporation. Would they simply seek approval by a special committee of independent directors, or would they also permit a majority-of-the-minority stockholder vote? This article focuses on one-step control stockholder buyouts structured as a merger; Delaware courts have traditionally applied a different standard of review when the buyout is structured with two steps , a tender offer followed by a short-form merger.

Background

In 1994, the Delaware Supreme Court ruled in Kahn v. Lynch Communications Systems, Inc ., 638 A.2d 1110 (Del. 1994), that “the exclusive standard of judicial review” in a control stockholder buyout “is entire fairness,” with “[t]he initial burden of establishing entire fairness rest[ing] upon the party who stands on both sides of the transaction.” The Kahn court also ruled that “approval of the transaction by an independent committee of directors or an informed majority of minority shareholders would shift the burden of proof on the issue of fairness to the plaintiff.” [emphasis added]. Since Kahn , control stockholder buyouts generally were conditioned on approval by a special committee of independent directors, but not on a majority-of-the minority stockholder vote due (at least in part) to the leverage such a vote could give to a well-organized and vocal minority.

Over a decade later, in In re Cox Communications, Inc. Shareholders Litigation, 879 A.2d 604 (Del. Ch. 2005), then-Vice Chancellor Strine promoted, in a footnote to his opinion, adoption of a “unified standard for reviewing control stockholder freeze-outs ' .” Under this formulation, appropriate use of a special committee of independent directors and a majority-of-the-minority stockholder vote would trigger presumptive application of “the business judgment standard of review ' .” However, “if the transaction does not incorporate both protective devices, or if a plaintiff can plead particularized facts sufficient to raise a litigable question about the effectiveness of one of the devices, then the transaction is subject to entire fairness review.”

Then, in 2010, Vice Chancellor J. Travis Laster went one step further by applying the unified standard in a control stockholder buyout. Because both protective devices had not been utilized by the control stockholder, the Vice Chancellor subjected the buyout to an entire fairness review. In so ruling, the Vice Chancellor recognized that his promotion of the unified standard in a control stockholder buyout could not become a permanent part of the fabric of Delaware corporate law until blessed by the Delaware Supreme Court.

Finally, on May 29, 2013, in In re MFW Shareholders Litigation, C.A. No. 6566-CS (Del. Ch. May 29, 2013), then-Chancellor Strine surprised many commentators by accepting a control stockholders' argument that the business judgment rule could, under the right circumstances, apply to a buyout by that control stockholder. In the Chancellor's view, the control stockholder had done everything right by conditioning the transaction, from the very beginning , on both independent board committee approval and a majority-of-the minority vote, thus entitling it to summary judgment in its favor. Recently, the Delaware Supreme Court affirmed the Chancellor's ruling in Kahn v. M&F Worldwide Corp., No. 334, 2013 (Del. March 14, 2014), but with a twist that may diminish the impact of what the Chancellor sought to achieve.

MacAndrews & Forbes' Buyout of MFW

In May 2011, MacAndrews & Forbes Holdings, Inc., the well-known holding company which, famously, also controls cosmetics giant Revlon, began to explore the acquisition of the publicly held shares of M&F Worldwide (MFW). At the time, MacAndrews & Forbes owned 43.4% of MFW, whose “stock price traded in the $20 to $24 per share range.”

When MFW stock closed at $16.96 on June 10, MacAndrews & Forbes opportunistically presented the MFW board with a letter offering to purchase the publicly held shares for $24 per share in cash. MacAndrews & Forbes specified that it would not proceed with the buyout unless approved by both a special committee of independent MFW directors and a majority-of-the-minority vote. The proposal also explained that while MacAndrews & Forbes had “no interest in selling” its MFW stake, a decision by either the special committee or the public stockholders not to approve the transaction “would not adversely affect our future relationship with the Company and we would intend to remain as a long-term stockholder.” Notably, this was exactly opposite of the approach of the control stockholder in Kahn v. Lynch, who threatened a hostile takeover if the target board rejected its offer.

The next day, the MFW board established a special committee of independent directors. The special committee in turn retained independent counsel and a financial adviser. The committee's charge was relatively broad, giving it the right not only to investigate, evaluate and negotiate MacAndrews & Forbes' offer, but also to “determine to elect not to pursue the Proposal ' .” The board also stipulated that it would not approve the transaction “without a prior favorable recommendation of the Special Committee ' .” However, presumably because MacAndrews & Forbes had indicated that it would not support an alternative transaction, the committee was not expressly given the right to seek another buyer or an alternative transaction.

After obtaining updated management projections, the special committee's financial adviser applied traditional methodologies to arrive at a valuation range for MFW of $15 to $45 per share. Despite MacAndrews & Forbes' position that it was a buyer but not a seller, the committee did seek its financial adviser's “advice about strategic alternatives, including values that might be available if MacAndrews was willing to sell.” Based on this advice, the committee's “analysis of those alternatives proved that they were unlikely to achieve added value for MFW's stockholders.”

Next, even though MacAndrews & Forbes' $24 offer fell within its adviser's valuation range, the committee “countered at $30 per share.” The committee recognized that this was “a very aggressive counteroffer,” particularly in light of negative “developments in both MFW's business and the broader United States economy ' .” Thus, when MacAndrews & Forbes made its “best and final” offer of $25, the committee “unanimously approved and agreed to recommend the Merger.” At the stockholders meeting that followed, the transaction “was approved by a vote of 65.4% of MFW's minority stockholders.”

The Court of Chancery Grants Summary Judgment

Despite the favorable vote of MFW's minority stockholders, the inevitable stockholder lawsuit against MacAndrews & Forbes, among others, “seeking post-closing relief ' for breach of fiduciary duty” proceeded in the Court of Chancery. After plaintiff stockholders “were provided with extensive discovery” over a period of 18 months, MacAndrews & Forbes sought and was granted summary judgment. In so ruling, Chancellor Strine applied the business judgment standard of review rather than the more intrusive entire fairness test. The Chancellor came to this decision on the basis of the dual protections afforded by MacAndrews & Forbes to MFW's minority stockholders from the outset of the transaction, as well as his conclusion, based on the record before him, that: 1) the special committee was duly established and empowered and acted with due care; and 2) the majority-of-the-minority stockholder vote was “fully informed and uncoerced.”

Among the reasons cited by Chancellor Strine for his adoption of the dual approval standard as a means of obtaining a business judgment standard of review was that, in his view, application of business judgment would equate to earlier dismissals of litigation over control stockholder buyouts. Under the Kahn v. Lynch approach, “absent the ability of defendants to bring an effective motion to dismiss, every case has settlement value, not for merits reasons, but because the costs of paying ' attorneys' fees to settle litigation and obtain a release without having to pay the minority stockholders in excess of the price agreed to by the special committee” are less than the costs inherent in a time-consuming trial on the merits to establish entire fairness. Chancellor Strine hoped that making a business judgment standard of review available in exchange for greater minority stockholder protections would provide control stockholders with a means to prevail on an early motion to dismiss.

The Supreme Court's Analysis

Plaintiff stockholders appealed the Chancellor's ruling to the Delaware Supreme Court. Quoting extensively from Chancellor Strine's opinion, and agreeing with his conclusion that “[t]his appeal represents a question of first impression,” the court affirmed the Chancellor's ruling granting summary judgment to MacAndrews & Forbes.

Applicability of the Business Judgment Rule

In response to this novel question, the Supreme Court, in a unanimous en banc ruling, proclaimed that “in controller buyouts, the business judgment standard of review will be applied if and only if:

1. the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders;
2. the Special Committee is independent;
3. the Special Committee is empowered to freely select its own advisers and to say no definitively;
4. the Special Committee meets its duty of care in negotiating a fair price;
5. the vote of the minority is informed; and
6. there is no coercion of the minority.”

Significantly, in explaining its reasons for adopting this new standard, the Supreme Court did not cite Chancellor Strine's hope that extension of business judgment review to control stockholder buyouts would result in early dismissal of the related stockholder litigation. To the contrary, the Supreme Court's formulation of the new standard would seem to imply that it will in fact be difficult for a defendant to win a motion to dismiss. Specifically, “[i]f a plaintiff can plead a reasonably conceivable set of facts showing that” any elements of the new standard were not satisfied, “that complaint would state a claim for relief that would entitle the plaintiff to proceed and conduct discovery.” Further, “[i]f, after discovery, triable issues fact remain ', the case will proceed to a trial in which the court will conduct an entire fairness review.” [emphasis added]. In other words, “unless both procedural protections for the minority stockholders are established prior to trial, the ultimate judicial scrutiny of controller buyouts will continue to be the entire fairness standard of review.”

This approach was emphasized in two footnotes included by the Supreme Court in its opinion.

In the first footnote, the Supreme Court cited to a lengthy discussion in its Americas Mining opinion to the effect that “it was not possible to make a pretrial determination that the independent committee had negotiated a fair price.” In fact, the Supreme Court stated in that opinion that “the burden shifting inquiry requires 'a look back at the substance, and efficacy, of the special committee's negotiations, rather than just a look at the composition and mandate of the special committee.'” As a result, “absent unique circumstances ', the burden shift will rarely be determinable on the basis of the pretrial record alone.” Consistent with the view expressed in Americas Mining, it would seem that the Supreme Court does not expect that control stockholders generally will be able to achieve early dismissal of stockholder litigation.

In the second footnote, the Supreme Court went on to indicate that the plaintiff MFW stockholders' original complaint “would have survived a motion to dismiss under this new standard.” In the Supreme Court's view, the complaint alleged with sufficient particularity that: 1) the valuation ratios applicable to the MacAndrews & Forbes buyout price were “'well below' those calculated for recent similar transactions”; 2) such price was “two dollars per share lower than the trading price only about two months earlier”; 3) “MWF's share price was depressed ' due to short-term factors”; and 4) “commentators viewed both [the] initial $24 per share offer and the final $25 per share Merger price as being surprisingly low.” These factors “call into question the adequacy of the Special Committee's negotiations, thereby necessitating discovery on all of the new prerequisites to the application of the business judgment rule.”

Although MacAndrews & Forbes ultimately obtained summary judgment, that did not occur until after 18 months of discovery. Only time will tell whether the Court of Chancery will demand a similar level of discovery in future litigation over control stockholder buyouts in which the dual protections are employed. If so, Chancellor Strine's hoped-for early dismissal of this type of litigation may not be realized.

Satisfaction of the Dual Standard

Emphasizing the “highly extensive record” before it, the Supreme Court turned next to an examination of whether the various elements necessary to achieve business judgment rule review had been established by MacAndrews & Forbes. The factors emphasized by the Supreme Court should prove useful to M&A planners in processing future control stockholder buyout transactions:

The special committee was “independent,” despite various business and social ties between committee members and affiliates of MacAndrew & Forbes. According to the Supreme Court, a plaintiff seeking to question a director's independence “must demonstrate that the director is 'beholden' to the controlling party 'or so under [the controller's] influence that [the director's] discretion would be sterilized.” Any ties must be ” material , in the sense that the alleged ties could have affected the impartiality of the individual director.” In other words, “[b]are allegations that directors are friendly with, travel in the same social circles as, or have past business relationships with the proponent of a transaction ' are not enough to rebut the presumption of independence.”

The special committee was “empowered,” even though “it did not have the authority, as a practical matter, to sell MFW to other buyers” due to MacAndrews & Forbes “announcement that it was not interested in selling its 43% stake.” This factor was outweighed by the fact that the special committee “was empowered not simply to 'evaluate' the offer ' but to negotiate with [M&F] over the terms of its offer to buy out the noncontrolling stockholders.” Further, “[t]his negotiating power was accompanied by the clear authority to say no definitively,” and bolstered by MacAndrews & Forbes' promise “that it would not proceed with any going private proposal that did not have the support of the Special Committee.” Also, the special committee did have “the leeway to get advice from its financial advisor about the strategic options available,” and it in fact acted upon this opportunity to “consider whether there were other buyers who might be interested in purchasing MFW, and whether there were other strategic options, such as asset divestitures, that might generate more value for minority stockholders '.”

The special committee “exercised due care” by, among other things, ensuring “that the process replicated arm's-length negotiations with a third party”; meeting “frequently” and reviewing “a rich body of financial information relevant to whether and at what price a going private transaction was advisable”; obtaining “new projections that reflected management's most up-to-date, and presumably most accurate, thinking”; having its financial adviser “conduct additional analyses and explore strategic alternatives”; and negotiating an increase in MacAndrews & Forbes initial offer for a price that “fell within the range of values produced by each of [its financial advisor's] valuation techniques” and was declared to be “fair” in the financial adviser's opinion.

The majority-of-the-minority stock- holder vote was “fully informed and uncoerced.” In particular, the Supreme Court applauded the proxy statement disclosure furnished to MFW stockholders, including the presentation of “the history of the Special Committee's work” as well as “five separate ranges for the value of MFW's stock” prepared by the special committee's financial adviser.

Conclusion

The Delaware Supreme Court's affirmance of then-Chancellor Strine's MFW ruling establishes that a one-step control stockholder buyout may receive a business judgment level of review, rather than a traditional entire fairness analysis, if the dual minority stockholder protections ' approval by an independent, fully empowered special board committee that functions in accordance with its duty of care and an uncoerced, fully-informed majority-of-the-minority stockholder vote ' are offered by the control stockholder from the outset. However, it remains to be seen whether M&A deal planners will find the procedural benefits of this new standard attractive enough to outweigh the potential risks of placing approval of a transaction in the hands of what have already become newly empowered and increasingly aggressive minority stockholders.

In making this determination, M&A deal planners will need to assess, among other things, whether they stand a better chance of obtaining an early dismissal of plaintiffs' claims by taking advantage of the Supreme Court's ruling. Significantly, the Supreme Court's position that an extensive record is required to establish that a special independent committee was not only properly established and empowered, but in fact exercised its power consistent with its fiduciary duty of care ' as stated in Americas Mining and reiterated in Kahn v. M&F Worldwide Corp. ' would seem to indicate that then-Chancellor Strine's vision of early dismissal of control stockholder buyout litigation through use of the dual minority stockholder protections may not be realized. If 18 months of discovery preceding a hearing on a summary judgment motion, or even a full trial on the merits, is required regardless of whether both protections are extended to minority stockholders, then deal planners might be content to continue the status quo of special board committee approval without a majority-of-the-minority stockholder vote.

Robert S. Reder, Professor of the Practice of Law at Vanderbilt Law School, has been serving as a consulting attorney at Milbank, Tweed, Hadley & McCloy LLP in New York City since his retirement as a partner in April 2011. Mr. Reder is a member of this Newsletter's Board of Editors.