This month, in a case of first impression, New York’s highest court held that under New York law, courts should review a going-private merger under the business judgment rule, provided among other things that the merger is approved by a Special Committee of independent directors and a majority of the minority stockholders. In re Kenneth Cole Prods., Inc., No. 54, 2016 N.Y. LEXIS 1059 (N.Y. May 5, 2016). In a going-private merger, a majority shareholder seeks to effectively remove public investors and gain ownership of the entire company. Plaintiffs who challenge going-private transactions often ask that courts review such transactions under the so-called entire fairness standard, which puts the burden on a company’s directors to show that they engaged in a fair process and obtained a fair price for the company. By contrast, under the business judgment rule, courts defer to the good faith determinations of officers and directors acting in the company’s interests.
In Kenneth Cole Productions, the Court of Appeals of New York specifically adopted the standard of review set by the Delaware Supreme Court in Khan v. M & F Worldwide Corp. (MFW), 88 A.3d 635 (Del. 2014). The Delaware Supreme Court held in MFW that “in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.” Id. at 645. The New York Court of Appeals applied this standard and determined that dismissal was appropriate where the plaintiff failed to sufficiently and specifically plead facts that would negate any of the six conditions enumerated in MFW. As a result, the business judgment rule applied, and the court deferred to the determinations of the special committee, which recommended approval of the merger at issue. Notably, the court made this determination based only on the pleadings and without permitting the plaintiff to proceed with discovery. This decision clarifies New York law regarding the standard of review in a going-private transactions, and shows that New York courts may rely upon Delaware case law at least with regard to lawsuits challenging these transactions. The full text of the Opinion is available here.