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