May 30, 2013

Delaware Chancery Court holds business judgment rule, not entire fairness, applies to going-private transactions approved by a special committee and a majority-of-the-minority vote.

On May 29, the firm was defense counsel in an important case that will have an impact on the structure of future going-private transactions involving controlling shareholders. In a much-publicized decision, Chancellor Strine of the Delaware Chancery Court held that the deferential business judgment rule – rather than a potentially fact intensive "entire fairness" standard – should apply to a going-private merger conditioned upfront by the controlling stockholder on approval by both a properly empowered, independent committee and an informed, uncoerced majority-of-the-minority vote. The decision, In re MFW Shareholders Litigation, No. 6566-C, granted summary judgment for all defendants. Willkie represented the independent Special Committee both in the underlying transaction and the litigation in the Delaware Chancery Court.

The litigation was initiated by purported shareholders of M&F Worldwide Corp. (MFW) in connection with a 2011 going-private transaction where MacAndrews & Forbes Holdings Inc. which owned 43% of MFW at the time, sought to acquire ownership of the remaining 57% of MFW. The transaction was conditioned upon the approval of an independent special committee (Willkie’s client) and a vote of the minority stockholders. After the Special Committee completed its work and the majority of minority shareholders approved the deal, defendants moved for summary judgment arguing that the business judgment rule (and not the entire fairness standard) should apply to the transaction in light of the procedural protections included in the transaction.

The court agreed and analogized the two procedural protections to "the arm’s length merger steps of the [Delaware General Corporation Law] by ‘requir[ing] two independent approvals, which it is fair to say serve independent integrity-enforcing functions.’" The court found that plaintiffs’ conclusory assertions regarding the Special Committee members’ business and social ties with MacAndrews & Forbes fell far short of meeting the standard to show that they were "‘beholden’ to the controlling party." After its careful review of the record, the court also concluded that the Special Committee had functioned properly and clearly had satisfied its duty of care. Finally, the fact that the majority-of-the-minority vote in favor of the merger was fully informed and uncoerced provided further support for the Committee’s work and the application of the business judgment rule.

The litigation was handled by partners Tariq Mundiya and Todd G. Cosenza and associates Christopher Miritello and Jill Grant. The underlying transaction was handled by partners Jeffrey Hochman and Michael Schwartz.