|June 28, 2013|
Previously published on June 25, 2013
In In re MFW Shareholder Litigation, C.A. No. 6566-CS, 2013 WL 2436341 (Del. Ch. May 29, 2013), the Delaware Court of Chancery analyzed one of the most important open questions of Delaware corporate law: whether it is possible for majority stockholders to structure a going private transaction to avoid “entire fairness” review by the Court and instead have the transaction be reviewed under the more deferential “business judgment” standard. After carefully considering precedent and scholarly commentary on this issue, the Court of Chancery concluded that majority stockholders sponsoring a going private transaction can obtain “business judgment” review of the transaction if:
- the controlling stockholder conditions the transaction on the approval of both (i) a special committee of the board of directors and (ii) a majority of the minority stockholders;
- the special committee is truly independent;
- the special committee is empowered freely to select its own advisors and to say “no” to the transaction definitively;
- the special committee meets its fiduciary duty of due care;
- the vote of the minority stockholders is fully informed; and
- minority stockholders are not coerced in connection with the vote.
Although this decision provides majority stockholders with a clear procedural framework for how to structure a going private transaction to avoid “entire fairness” review, some uncertainty will remain until the Delaware Supreme Court rules on this issue.
M&F Worldwide (“MFW”) is a holding company incorporated in Delaware engaged in a wide variety of businesses. MFW was 43.4% owned by MacAndrews & Forbes, which was in turn owed by Ron Perelman. In May 2011, Perelman began to explore the possibility of taking MFW private by merging it with MacAndrews & Forbes. Perelman then sent a proposal to MFW’s board offering to purchase its shares for $24 in cash. Notably, the proposal stated, among other things:
We will not move forward with the transaction unless it is approved by . . . a special [independent] committee. In addition, the transaction will be subject to a nonwaivable condition requiring the approval of a majority of the shares of the Company not owned by M&F or its affiliates.
In response to the offer, the independent directors of MFW decided to form a special committee to further evaluate Perelman’s offer. The independent directors specifically empowered the special committee to (i) perform such investigations as it deemed appropriate; (ii) evaluate the terms of the proposal; (iii) negotiate with Perelman regarding the terms of the proposal and any final agreement; (iv) report any final recommendations to the board; and (v) have the ability to decline the proposal outright. The independent directors also decided that the board of MFW would not approve the proposal without a prior favorable recommendation by the special committee. Although the special committee had the authority to negotiate and say “no,” it did not have authority to market MFW to other buyers.
The special committee interviewed four financial advisors before hiring Evercore Partners (“Evercore”). Evercore produced a range of valuations for MFW from $15 to $45 per share. With Evercore’s analysis in tow, the special committee decided to counter Perelman’s offer at $30 per share. The parties negotiated until Perelman made a best and final offer of $25 per share. Evercore opined that the price was fair, and the special committee and MFW’s independent directors unanimously decided to accept the offer and recommend it to the stockholders.
In November 2011, MFW issued a detailed proxy statement to stockholders recommending that they approve the transaction. Ultimately, 65% of the minority stockholders approved MFW’s merger with MacAndrews & Forbes, and the transaction was consummated.
In response, some stockholders sued MacAndrews & Forbes, Perelman and the other directors of MFW, alleging the transaction was unfair. After initially seeking a preliminary injunction to block the merger vote, plaintiffs instead chose to seek post-closing damages for breach of fiduciary duty. Defendants moved for summary judgment arguing that no material issue of fact existed regarding whether MFW’s special committee was truly independent with the power to say “no,” or whether the transaction was approved by a fully informed majority of the minority of stockholders. The court agreed and granted summary judgment in favor of defendants.
Whether a majority stockholder-sponsored going private transaction may be reviewed under the business judgment rule when it is both approved by a special committee of independent directors with the power to negotiate and say “no” and subject to the approval of the majority of the minority stockholders was an issue of first impression for the Delaware courts. Plaintiffs argued that the more rigorous “entire fairness” review applied, relying upon the Delaware Supreme Court’s decision in Kahn v. Lynch Communication Systems, 638 A.2d 1110, 1117 (Del. 1994). The court here, however, distinguished Kahn v. Lynch because the transaction at issue there was procedurally different from the transaction at issue in MFW. The transaction in Kahn v. Lynch was a merger between a parent corporation, Alcatel, and the subsidiary that it controlled, Lynch. Alcatel owned 43% of Lynch, and sought to obtain the rest of Lynch through a cash-out merger. Lynch created a special committee to negotiate with Alcatel. The Lynch merger, however, was conditioned only upon the approval of the special committee, not also on the approval of the non-Alcatel stockholders. Furthermore, the special committee in Lynch was not empowered to say “no,” because Alcatel reserved the right to and did in fact threaten to approach the stockholders with a tender offer at a lower price should the special committee reject the proposed transaction.
After distinguishing Kahn v Lynch, the Court of Chancery concluded that “business judgment” review should govern the transaction between Perelman and the minority stockholders of MFW because the procedural safeguards employed were the optimal ones for the minority of stockholders. The court reached this conclusion after discussing a series of scholarly articles examining majority stockholder sponsored transactions and the effect of plaintiffs litigation on the final price obtained by minority stockholders. By giving controlling stockholders access to “business judgment” review for going private transactions, a strong incentive is created to give minority stockholders much broader access to the transactional structure that is most likely to effectively protect their interests.
The MFW decision is quite significant. If the Delaware Supreme Court affirms, controlling stockholders will have a clear procedural roadmap for how to structure going private transactions to obtain the benefit of the deferential “business judgment” standard of review. This is critical. By offering the majority stockholders a procedure for obtaining “business judgment” review, the majority stockholder will be able to avoid court scrutiny of the substance of the transaction. Instead, the court will limit its oversight to whether the transaction was approved by an independent special committee with the power to negotiate and say “no,” and by an uncoerced fully informed majority of the minority stockholders. This decision also may deter a certain amount of stockholder litigation that almost always follows the announcement of a “going private” transaction by lowering the likely settlement value of cases filed in response to transactions structured pursuant to the MFW framework.