New Delaware Standard Proposed for Review of Target Boards

Professor Samuel C. Thompson, Jr., Professor of Law and Director of the Center for the Study of Mergers & Acquisitions at the Pennsylvania State University School of Law, has written an article that proposes a new single standard to address the multiple standards that have been discussed in Delaware court decisions to determine the type of review that the courts will employ against target boards who are involved in a takeover transaction. The article, entitled Change of Control Special Committee: Breathing Life into CNX, is highlighted here on the Harvard Law School Corporate Governance Blog and is available on SSRN here. In a brief introduction to the article, the good professor explains the problem as: "... the multiple standards of review under Delaware law for reviewing the actions of a target's directors involved in a merger or acquisition transaction are cumbersome, a source of needless litigation, and economically inefficient."

Professor Thompson's scholarship in the field of mergers and acquisitions generally was cited extensively and relied on for the reasoning in the Delaware Court of Chancery's recent opinion in GRT Inc. v. Marathon GTF Technology Ltd., C.A. No. 5571-CS (Del. Ch. July 11, 2011), highlighted on these pages here.

The solution that his article proposes, in part, is: "... to resolve these issues through changes in Delaware's General Corporation Law ("DGCL"). The DGCL should be amended to permit the shareholders of a corporation to adopt a provision requiring that if the corporation becomes a target of a bona fide acquisition proposal, the board of the corporation must petition the Delaware Court of Chancery for the appointment of an independent, disinterested, and knowledgeable special committee of the board (a "Change of Control Special Committee"). This Committee would have complete power over the acquisition transaction. At the discretion of the Delaware Court of Chancery, a member of the current board could be appointed to the Change of Control Special Committee.  All decisions of the Change of Control Special Committee, including any decision to employ, maintain, or terminate a poison pill, would be subject to the deferential business judgment rule standard of review."

The Court of Chancery's first CNX decision, In Re CNX Gas Corp. Shareholders Litigation, C. A. Consol. No. 5377-VCL (Del Ch. May 25, 2010), which recites the various standards currently applied, was highlighted here, and the Chancery ruling allowing an interlocutory appeal to the Delaware Supreme Court (which was rejected by Delaware's High Court), was highlighted here.

Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.

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