Kahn v. M & F Worldwide Corp.

Supreme Court of Delaware · 2014 · Corporations

CorporationsControlling stockholder mergersStandard of reviewFiduciary dutiesentire fairnessbusiness judgment rulecontroller buyoutfreeze-out merger

Facts

M & F, which owned 43.4% of MFW, proposed to buy the remaining shares for cash and from the outset made the proposal subject to two nonwaivable protections: approval by an independent special committee and approval by a majority of the unaffiliated minority stockholders. The MFW board formed a special committee of independent directors, empowered it to hire its own advisors, negotiate, and reject the deal definitively, and the committee retained its own legal and financial advisors, met eight times, negotiated from $24 to $25 per share, and evaluated alternatives. The merger proxy disclosed the committee's process, the updated projections, and Evercore's valuation ranges, and more than 65% of the minority shares approved the transaction. Plaintiffs argued that the special committee was not truly independent or effective and that entire fairness review should still apply.

Issue

What standard of review applies to a merger between a controlling stockholder and its subsidiary when the controller conditions the transaction from the outset on both approval by an independent, adequately empowered special committee that fulfills its duty of care and an informed, uncoerced majority-of-the-minority vote? Also, did the undisputed record here satisfy those conditions so that summary judgment under business judgment review was proper?

Rule

In a controller buyout, business judgment review applies if and only if: (i) the controller conditions the procession of the transaction on approval by 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 minority vote is informed; and (vi) there is no coercion of the minority. If either protection is missing, not established before trial, or ineffective, the transaction remains subject to entire fairness review, though use of only one protection may shift the burden of persuasion.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

North Harbor Holdings owns 46% of Lakeview Components, a Delaware corporation headquartered in Cleveland. In January, North Harbor privately proposes a cash freeze-out conditioned only on approval by an independent special committee; three weeks later, after negotiations begin, it adds a nonwaivable majority-of-the-minority voting condition.

If minority stockholders challenge the merger, which standard of review should a Delaware court apply?

Explanation. Business judgment review applies only if the controller conditions the transaction ab initio on both special-committee approval and a majority-of-the-minority vote, along with the other MFW conditions. Adding the minority-vote condition later does not satisfy the upfront requirement. Under the majority opinion, unless both protections are established prior to trial and were part of the structure from the beginning, the transaction remains subject to entire fairness review, though one protection alone may shift the burden.