The More Things Change? Delaware Supreme Court Applies Business Judgment Standard Of Review In Going-Private Transaction

Kahn v. M&F Worldwide Corp

On March 14, 2014, the Delaware Supreme Court issued its decision in the widely followed case Kahn v. M&F Worldwide Corp. ("M&F Worldwide"), providing a blueprint for a controlling stockholder of a Delaware corporation to do a going-private transaction without subjecting the deal to "entire fairness" review by the courts, but instead the less exacting "business judgment" standard. The Supreme Court held that the business judgment standard will "govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders."1

The Supreme Court's ruling affirmed the May 2013 decision of the Delaware Court of Chancery granting summary judgment in In re MFW Shareholders Litigation.2 The Court of Chancery's decision was rendered by then-Chancellor Leo E. Strine, Jr., who became the Chief Justice of the Delaware Supreme Court on February 28, 2014, just two weeks before the Supreme Court affirmed his decision. While Chief Justice Strine did not participate in the decision of the Supreme Court affirming his own decision below, his colleagues on the court adopted and quoted much of his reasoning. Nonetheless, the Supreme Court added observations and commentary indicating a more constrained view of the extent to which a controlling stockholder following the blueprint laid out by the court will be able to limit or cut short the litigation that going-private transactions invariably generate.

Background of the Transaction

The case arose out of a dispute between the minority stockholders of M&F Worldwide Corporation ("MFW") and its controlling stockholder, MacAndrews & Forbes Holding Inc. ("MacAndrews"). MacAndrews, whose equity is owned by Ronald Perelman, owned 43% of MFW. In June 2011, MacAndrews offered to purchase the outstanding shares of MFW for $24 per share. From the outset, MacAndrews maintained that it would not consider a going-private transaction unless it was approved by an independent special committee, and a vote of the majority-of-the-minority stockholders was a non-waivable condition to the transaction. In the months immediately following the initial proposal, the Board of Directors formed an independent special committee to negotiate with MacAndrews. The special committee selected its own legal and financial advisors, met several times over the course of three months, and negotiated extensively with MacAndrews. As a result of thorough negotiations, the special committee procured an offer of $25 per share. Three months later, 65% of the shares unaffiliated with the controlling stockholder voted in favor of the transaction and the transaction was consummated.

Proceedings and Decision in the Court of Chancery

Plaintiffs brought suit seeking a preliminary injunction in advance of the merger vote to prevent the buyout. They subsequently withdrew their injunction motion, but pursued their claim for damages based on breach of fiduciary duty after the merger closed. Following extensive discovery, the defendants moved for summary judgment, contending that the Court of Chancery should review the deal under the business judgment standard rather than the entire fairness test. Under the business judgment rule, the court does not inquire into the substantive fairness of the merger but instead will dismiss a challenge to the merger unless its terms were so disparate that no rational person acting in good faith could have thought the merger was fair to the minority. By contrast, the entire fairness test, which is "the highest standard of review in corporate law,"3 requires that the court examine the entire fairness of the transaction to the minority...