In Kahn v. M&F Worldwide Corp.,1 the Delaware Supreme Court unanimously affirmed the Court of Chancery’s decision that the more deferential business judgment rule standard of review, rather than an entire fairness standard of review, applies to controlling stockholder buyouts if merger discussions are conditioned up front on both the negotiation and approval of an empowered independent committee and an uncoerced, fully informed, majority-of-the-minority stockholder vote.
The Delaware Supreme Court recognized that the historical, more intrusive, “entire fairness” standard of review imposed a substantial unnecessary litigation burden on defendant directors and the controlling stockholder without any practical benefit to minority investors. Under the new standard, if the process is properly structured, the defendants should win dismissal of shareholder lawsuits without expensive and time-consuming discovery regarding the financial fairness of the deal. If the sale process is sufficient from a procedural perspective to invoke the new business judgment standard, the claims against the defendant directors and controlling shareholder must be dismissed unless no rational person could have believed that the merger was favorable to the minority stockholders.
Under the new standard, the business judgment standard of review will be applied if and only if:
- The controlling stockholder conditions the procession of the transaction on the approval of both a special committee and a majority of the minority stockholders;
- The special committee is independent;
- The special committee is empowered to freely select its own advisors and to say no definitively;
- The special committee meets its duty of care in negotiating a fair price;
- The vote of the minority is informed; and
- There is no coercion of the minority stockholders.
If any of these conditions are not established, the historical entire fairness standard of review will continue to apply.