Delaware Chancery Court: Business Judgment Rule Applies to Going-Private Transaction

About the Authors:

James Edward Maloney is a partner and Katharine M. Atlas is an associate at the Houston office of Andrews Kurth LLP.

On May 29, 2013, the Delaware Court of Chancery issued an important securities-law decision, holding that the Business Judgment Rule standard of review applies to going-private transactions with controlling stockholders under certain conditions.

In In re MFW Shareholders Litigation, C.A. No. 6566-CS (Del. Ch. May 29, 2013), Chancellor Leo E. Strine Jr. ruled that Delaware courts should apply the Business Judgment Rule, and not the Entire Fairness standard of review, so long as two conditions apply. First, the transaction must be negotiated and approved by a special committee of independent directors free to select its advisors and empowered to say no definitively. Second, the transaction must be approved by an uncoerced, fully informed vote of a majority of the minority.

The case arose out of a 2011 proposal by MacAndrews & Forbes Holdings Inc. (MacAndrews) to acquire MFW in a going-private transaction. MacAndrews owned 43 percent of the MFW outstanding stock at the time of the proposal, and sought to acquire the remaining 57 percent at a price of $24.00 per share. However, MacAndrews specifically conditioned its offer on both (1) a non-waivable majority-of-the-minority approval, and (2) approval by a special committee.

MFW's board of directors formed a special committee of independent directors to negotiate with MacAndrews. The special committee picked its own financial advisors, met eight times over three months, and actively negotiated with MacAndrews. The special committee was able to get MacAndrews to raise its bid by $1.00 per share, to $25.00 per share, which represented a 47 percent premium over the publicly-traded stock price.

After approval by the special committee, the offer was presented to the remaining independent members of MFW's board of directors and approved unanimously. The offer was then approved by an affirmative vote of the majority of the minority of MFW stockholders, with 65 percent approving the merger.

Chancellor Strine evaluated the independence of the individual directors, their steps to value and negotiate the proposal, and the circumstances surrounding the vote by the minority stockholders. Finding that plaintiffs had alleged no facts that could question the independence of the special committee members and noting that the various valuations of MFW shares were consistent with the $24.00 offer price, the court ruled that there was no triable issue of fact as to the special committee's satisfaction of the duty of care. Combined with the "cleansing device" of a majority-of-the-minority vote, the court noted that the conditions in this case were sufficient to invoke the Business Judgment Rule standard of review.

The court emphasized, however, the Business Judgment Rule is available only if (1) the controller conditions the transaction on the approval of both a special committee and a majority of the minority stockholders, (2) the special committee is independent, (3) the special committee is empowered to freely select its own advisors and to say no definitively, (4) the special committee meets its duty of care, (5) the minority vote is informed, and (6) the minority is not coerced. If any of these conditions is not satisfied, the transaction will be evaluated under the Entire Fairness standard and not the Business Judgment Rule.

Chancellor Strine noted the application of the Business Judgment Rule provides an incentive to controlling stockholders to satisfy these conditions, as an alternative to the "inherently more coercive" tender offer. He also noted that minority shareholders have the right to an appraisal in a going-private transaction, and that the prevalence of institutional investors has made that right more effective in recent years.

The Business Judgment Rule provides a less rigorous standard of review, which gives controlling shareholders a strong basis to dismiss shareholder litigation at the pleading stage before undergoing the high costs of discovery. Although Chancellor Strine noted that rational minds can disagree on this issue, and the case may ultimately be decided on appeal by the Delaware Supreme Court, he determined that the Business Judgment Rule is the correct standard under these circumstances.



Nominations Sought for Section Leadership Positions

Do you know anyone who has what it takes to be a good Section leader? The Nominating Committee of the Section needs your recommendations for leadership positions for the 2017-2018 association year. Nominees will be selected for: Chair-elect (who automatically assumes the position of chair the following year); Secretary (who automatically assumes the position of vice chair the following year); Content Officer; two Section Delegates to the ABA House of Delegates; and five additional Council members for a four-year term expiring in 2021. The Nominating Committee will take into account the following principles in making its selections. It will: select nominees who have been substantial and active contributors to the Section; seek geographic diversity in the leadership of the Section; strive for representation from a broad cross-section of the areas of law represented in the Section; and seek to draw leaders from a broad cross-section of the various sectors of practice, including corporate law departments, government, academia and private law firms; and actively recruit nominees that reflect the diversity of the Section. Please send your nominations by email to no later than November 18.

Question: Between November 2, 2015 and November 4, 2015, Harris Poll conducted an online survey of 2,017 adults ages 18 and older on behalf of NerdWallet, Inc. to understand U.S. consumers’ credit card payment habits and feelings around different types of debt. The results of this study were published in the 2015 American Household Credit Card Debt Study. According to the 2015 American Household Credit Card Debt Study, what percentage of U.S. adults would be more embarrassed to tell others about credit card debt than any other type of debt?
A. 10%
B. 35%
C. 55%
D. 90%

Question: From the late 1600s to the early 1800s, “debtors’ prisons” were commonplace with many cities and states operating brick-and-mortar detention facilities that were designed for incarcerating individuals who were unable or unwilling to pay their debts. Imprisonment for indebtedness was so commonplace that two signatories of the Declaration of Independence were jailed for failure to pay their debts. Can you name those two signatories?

The November issue of Business Law Today will focus on Nonprofits. Articles will range from the “Delaware Advantage” to nonprofit organizations needing nonprofit lawyers. In addition, other features include keeping pace with disruptive technological change, insurance bad faith recoveries, and constitutional issues in granting Americans a “Right to Dispute.”

Do you have a great idea for a BLT article? Would you like to see more of a featured column? Let us know how we can make Business Law Today the best resource for you and your clients. We welcome any suggestions. Please send us your feedback here.

Business Law Section Fall Meeting
November 18-19, 2016
Washington, DC

Business Law Section Spring Meeting
April 6-8, 2017
New Orleans, LA

Miscellaneous IT Related Legal News (MIRLN) 25 September - 15 October 2016 (v19.14)

BLT is a web-based publication drawing upon the best of the Section's resources, including featured articles and other information from around the Section. Stay informed on the latest business law practice news and information that will benefit you and your clients.