In re MFW Shareholders Litigation

Delaware Court of Chancery · Corporations

CorporationsControlling stockholder mergersStandard of reviewBusiness judgment ruleEntire fairnesscontrolling shareholderfreeze-out mergergoing private merger

Facts

MacAndrews & Forbes, wholly owned by Ronald Perelman, owned 43.4% of MFW and offered to buy the remaining shares for $24 per share, stating at the outset that it would not proceed without both approval by an independent special committee and a non-waivable majority-of-the-minority vote. The MFW board formed a special committee, which hired its own legal and financial advisors, met eight times over about three months, considered financial data and alternatives, rejected the initial bid, and negotiated the price up to $25 per share. The committee was empowered to negotiate and definitively say no, and MacAndrews & Forbes promised it would not bypass the committee. After full disclosure in the proxy, 65% of the unaffiliated shares voted in favor of the merger, and the transaction closed.

Issue

What standard of review applies to a controlling stockholder going-private merger when, from the controller’s first proposal, the transaction is conditioned on both approval by an independent, adequately empowered special committee and an informed, uncoerced majority-of-the-minority vote? Relatedly, did the procedural protections used here qualify as effective cleansing devices so that summary judgment could be granted under that standard?

Rule

When a controlling stockholder merger is conditioned from the outset on both (i) negotiation and approval by an independent special committee that is fully empowered to say no, select its own advisors, and fulfills its duty of care, and (ii) approval by an informed, uncoerced majority of the minority stockholders, the business judgment rule applies rather than entire fairness review. If any of those required conditions is absent, the transaction does not receive business-judgment treatment on that basis.

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Granite Peak Holdings owns 46% of Riverbend Packaging, a Delaware corporation based in St. Louis. In January, Granite Peak proposes a cash-out merger and states in its first written offer that it will not proceed unless an independent special committee approves the deal and a nonwaivable majority of Riverbend’s unaffiliated shares vote in favor; both approvals are later obtained after negotiation and full disclosure.

If minority stockholders sue for breach of fiduciary duty after closing, what standard of review should a Delaware court apply under the lead opinion’s rule?

Explanation. The lead opinion holds that business judgment review applies when, from the controller’s first overture, the merger is conditioned on both protections: approval by an independent special committee that is fully empowered and fulfills its duty of care, and approval by an informed, uncoerced majority of the minority. When those conditions are present together ab initio, the court treats the structure as sufficiently analogous to arm’s-length bargaining to warrant business judgment deference. (Derived from In re MFW Shareholders Litigation (n.d.).)