November 24, 2014

Court applies business judgment rule and rejects “entire fairness” standard.

On November 20, a New York appellate court affirmed the dismissal of the plaintiff's action against Willkie client Kenneth Cole, in which minority shareholders challenged the fashion designer’s going-private transaction involving Kenneth Cole Productions, Inc. This is the first appellate decision under New York law to apply the business judgment rule to a going-private transaction where the transaction has the dual protections of a "majority of the minority" voting provision and the transaction is approved by a committee of independent directors.

The lower court had dismissed the complaint and applied the business judgment rule rather than the more onerous "entire fairness" standard. For a description of that decision click here. In upholding the dismissal and distinguishing prior precedent from the New York courts, the appellate court held that "contrary to plaintiff’s claim, the motion court was not required to apply the 'entire fairness' standard to the transaction by which Mr. Cole…. took the company private.” The Appellate Division held that the "merger in the case at bar required the approval of a majority of the minority (i.e., non Cole) shareholders." The court held further that "pre-discovery dismissal based on the business judgment rule was appropriate since there are no allegations sufficient to demonstrate that the members of the board or the special committee did not act in good faith or were otherwise interested."

The matter was handled by Tariq Mundiya, Sameer Advani and Benjamin McCallen.

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