Kahn v. MF Worldwide Corp.

The Delaware Supreme Court Affirms In re MFW Holding That a Going-Private Transaction May Gain the Benefit of Business Judgment Review

On March 14, 2014, the Delaware Supreme Court decided Kahn v. MF Worldwide Corp. Previously, in In re MFW, then-Chancellor (now Chief Justice) Strine2 and unanimously affirmed the Chancery Court's ruling in In re MFW.3 As we discussed 4 ruled that a going-private transaction with a controlling shareholder — typically subject to searching "entire fairness" review by the courts — may gain the benefit of the deferential business judgment rule if, at the outset of negotiations, the controller conditions any transaction on approval from both (1) an independent special committee of the board and (2) a majority of unaffiliated shareholders (a "majority-of-the-minority vote"). The rationale for the rulings is that, under those circumstances, the controller voluntarily relinquishes control over the transaction and it becomes akin to an arm's-length, third-party merger.

In MF Worldwide, the Supreme Court affirmed, but made clear that the courts must closely review controlling-party transactions to ensure that the requirements for business judgment review are met, including a truly independent special committee, empowered to negotiate (and ultimately to decline to consummate) a transaction and a fully informed and un-coerced minority shareholder vote. Thus, while MF Worldwide provides a predictable roadmap for a controlling shareholder to minimize the burden of litigating challenges to going-private transactions, a controller seeking the benefits of the business judgment rule must, in addition to undertaking the commitments required by MF Worldwide, take steps to establish a record demonstrating that the conditions for business judgment review under MF Worldwide are met and that the transaction replicates an arm's-length deal.

BACKGROUND

Prior Law. Under the business judgment rule, courts typically will not inquire into the substantive fairness or reasonableness of board action.5 As a result, challenges to transactions considered under the business judgment rule will be dismissed on the pleadings unless a plaintiff can plead facts showing that no rational person in good faith could have thought that the transaction was fair.6

Under the Chancery Court's 1994 decision in Kahn v. Lynch Commc'ns Syst., however, courts will assess the "entire fairness" of controlling-shareholder transactions by assessing whether the controller dealt fairly with the board and the transaction was completed at a fair price.7 Practically speaking, in contrast to business judgment review, entire fairness review "normally will preclude dismissal of a complaint" on a motion to dismiss.8 As a result, controlling-shareholder transactions have been particularly vulnerable to costly and burdensome litigation. As then-Vice-Chancellor Strine wrote in In re Cox Communications, "[u]nlike any other transaction one can imagine...