In controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a special committee and a majority of the minority stockholders; (ii) the special committee is independent; (iii) the special committee is empowered to freely select its own advisors and to say no definitively; (iv) the special committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority. If a plaintiff that can plead a reasonably conceivable set of facts showing that any or all of those enumerated conditions did not exist, that complaint would state a claim for relief that would entitle the plaintiff to proceed and conduct discovery.
MacAndrews & Forbes Holdings, Inc. (M&F) owned 43.4% of the stocks of M&F Worldwide Corp. (MFW). In 2011, M&F proposed to acquire the remaining shares of MFW in order to privatize the latter. M&F's proposal to take MFW private was made contingent upon two stockholder-protective procedural conditions. First, M&F required the Merger to be negotiated and approved by a special committee of independent MFW directors (the "Special Committee"). Second, M&F required that the Merger be approved by a majority of stockholders unaffiliated with M&F. The Merger closed in December 2011, after it was approved by a vote of 65.4% of MFW's minority stockholders. The plaintiffs, Kahn, et. al. initially sought to enjoin the transaction. They withdrew their request for injunctive relief after taking expedited discovery, including several depositions. They then sought post-closing relief against the defendants, M&F, Ronald O. Perelman (owner of M&F), and MFW's directors (including the members of the Special Committee) for breach of fiduciary duty. The defendants then moved for summary judgment, which the Court of Chancery granted. On appeal, the plaintiffs contend that the Court of Chancery erred in concluding that no material disputed facts existed regarding the conditions precedent to business judgment review. The plaintiffs submit that the record contains evidence showing that the Special Committee was not disinterested and independent, was not fully empowered, and was not effective. The plaintiffs also contend, as a legal matter, that the majority-of-the-minority provision did not afford MFW stockholders protection sufficient to displace entire fairness review.
Is business judgment the appropriate standard of review for a merger between a controlling stockholder and its subsidiary?
Yes, but with conditions
In a determination of the standard of review for a merger between a controlling stockholder and its subsidiary, where the merger was conditioned ab initio upon the approval of both an independent, adequately-empowered special committee that fulfilled its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders, the Court held that the business judgment standard of review would be applied if and only if the controller conditioned the procession of the transaction on the approval of both a special committee and a majority of the minority stockholders, the special committee was independent, the committee was empowered to freely select its own advisors and to say no definitively, the committee met its duty of care in negotiating a fair price, the vote of the minority was informed, and there was no coercion of the minority. In this case, the evidence has shown that the special committee was independent, empowered, and has exercised due care. It has also been shown that the minority was not coerced into voting for the merger. As such, the Court concluded that the claims against the Defendants must be dismissed.