We previously reported on the Delaware Supreme Court’s landmark decision in Kahn v. M&F Worldwide Corp. (MFW) applying the deferential, defendant-friendly business judgment rule rather than the more exacting entire fairness standard in lawsuits challenging M&A deals involving controlling stockholders. The nation’s leading forum for disputes over corporate merger transactions made it harder for plaintiffs to challenge so-called controller buyouts (also known as “freeze-outs” or “going-private” mergers) if the company’s board of directors uses robust procedural safeguards—namely, conditioning the transaction, upfront, on approval by a special committee of disinterested directors and a majority of shareholders unaffiliated with the controlling stockholder.

Last week, the New York Court of Appeals, New York’s highest court, expressly adopted the business judgment standard of review announced by the Delaware Supreme Court in MFW, making it easier for companies to obtain early dismissal of shareholder strike suits if the same conditions set forth in MFW are met. Relying on MFW, the NY Court of Appeals upheld the dismissal of a shareholder class action targeting Kenneth Cole’s buyout of his namesake company. The court reasoned that “where the controlling shareholder clearly disabled itself from using its control to dictate the outcome, the merger acquired the characteristics of ‘third-party, arm’s length mergers’” and thus adequately protected the rights of minority shareholders.

The high court further explained how companies can ensure deferential business judgment review:

[I]n 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.

If these conditions (the MFW conditions) are met, the court will apply the business judgment rule, which respects the unbiased business decisions of corporate officers and directors that certain actions will promote the corporation’s interests. Under the business judgment rule, the transaction will be immune from judicial inquiry absent allegations of fraud or bad faith on the part of the controller or directors who approved the deal. Traditionally, interested-director transactions such as going-private mergers are subject to exacting scrutiny under the entire fairness standard, which requires the defendants to prove the transaction was the product of fair dealing and that it paid minority shareholders a fair price for their stock.

In Kenneth Cole Productions, Cole, the controlling stockholder and prospective buyer, removed himself from the decision-making process. The board appointed a special committee that retained independent financial advisors to help evaluate the fairness of Cole’s offer, and the committee effectively negotiated with Cole, causing him to raise his offer. Notably, the court found that the committee satisfied its duty of care even though it did not seek out other competing bids. Ultimately, the court affirmed dismissal of the case because the plaintiff did not sufficiently allege that any of the six enumerated MFW conditions were absent.

The decision is important because New York, the nation’s second leading forum for disputes over corporate M&A deals, has definitively endorsed the MFW standard. MFW, along with Kenneth Cole, strikes a balance between protecting shareholder rights on the one hand, and protecting business decisions from unwarranted judicial interference and avoiding frivolous litigation, on the other.