Last week the Delaware Supreme Court affirmed a Court of Chancery order dismissing a complaint attacking a cash-out merger of SynQor, Inc., a privately held Delaware corporation,1 into an entity controlled by SynQor’s management group, which held 46% of the company’s stock. The affirmance is significant for two reasons. First, it is the first application of Kahn v. M&F Worldwide,2 which held that if six specific criteria are satisfied, a merger that would otherwise be reviewed under the entire fairness standard will instead be reviewed under the business judgment standard. Second, the SynQor decision establishes that: (1) M&F Worldwide applies to acquisitions of private as well as public corporations, and (2) it is possible for a case meeting the M&F Worldwide criteria to be dismissed at the pleadings stage, without discovery, a summary judgment proceeding or a trial.
The facts were fairly straightforward. Under the merger agreement, the minority stockholders would receive $1.35 per share, and the merger would be subject to the approval of both a special negotiating committee of independent directors, and a majority of the unaffiliated minority stockholders. The special negotiating committee, which consisted of two independent directors, was empowered to retain its own advisors, and to veto any transaction terms that the committee did not approve. After negotiating a $0.25 per share increase in the merger price, the committee approved the merger, which later was approved by 61% of the unaffiliated minority stockholders.
The applicable law was straightforward as well. Under M&F Worldwide, a merger that would otherwise be subject to entire fairness review would be reviewed under the business judgment standard if the following criteria are met: (1) the controller conditions the transaction on the approval of both a special committee and of 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 “just say no” to any transaction proposal; (4) the special committee discharges its duty of care in negotiating a fair price; (5) the vote of the minority stockholders is fully informed; and (6) the minority stockholders are not coerced.
A stockholders’ class action, claiming that the merger was not entirely fair, was filed in the Delaware Court of Chancery. The defendants moved to dismiss, arguing that the merger was structured to, and did, comply with M&F Worldwide. The plaintiffs countered that M&F Worldwide applied only to public company acquisitions, and that SynQor was privately held.
The Court of Chancery rejected the plaintiffs’ arguments, holding that the plaintiffs had failed to plead facts calling into question any of the M&F Worldwide elements, all of which (the court held) were satisfied here, and failed to plead facts sufficient to overcome the business judgment review presumption that the board, in approving the merger, properly discharged its fiduciary duties. The court further held that Delaware law does not distinguish between publicly and privately held corporations in applying fiduciary review principles. Lastly, the court confirmed that M&F Worldwidecan be applied at the motion to dismiss stage, noting that “the whole point of encouraging this structure was to create a situation where defendants could effectively structure a transaction so that they could obtain a pleading-stage dismissal against breach of fiduciary duty claims.”
SynQor is significant to corporate practitioners and litigators because it affords predictable and reliable guidance for avoiding highly expensive and time-consuming entire fairness review of controlled, non-arm’s length corporate acquisitions. In that regard the case also marks a notable and defendant-friendly departure from the prior case law,3 and is part of a broader effort by the Delaware Supreme Court to reduce the costs of litigating corporate acquisitions generally.4