May 5, 2016

New York’s highest court issues ruling that the business judgment standard of review, not entire fairness, applies to going-private transactions involving controlling shareholders. 

In a case of first impression, on May 5, the New York Court of Appeals in In re Kenneth Cole Productions Shareholder Litig., Apl. No. 2015-00155 (N.Y.), held that the business judgment rule — rather than the fact-intensive “entire fairness” standard — applied to going-private mergers involving controlling shareholders.  Adopting the standard established by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), the Court of Appeals affirmed the lower courts’ application of the business judgment standard of review and dismissal of the action based upon the shareholder protections that Kenneth Cole had built into the structure of the transaction (which was handled by Willkie).

Partner Tariq Mundiya, who also represented the special committee in MFW, argued the appeal for Kenneth Cole before the New York Court of Appeals.  This landmark ruling, which puts New York and Delaware on the same footing, provides that going-private transactions involving controlling shareholders will get the benefit of the deferential business judgment standard of review if the transaction is approved by (1) an independent special committee and (2) a fully informed majority of the minority shareholders.  The Court adopted this standard established by the MFW court, finding it properly balanced the rights of minority shareholders against “the interests of directors and controlling shareholders in avoiding frivolous litigation and protecting independently-made business decisions from unwarranted judicial interference.”  Applying this standard here, the Court found that “[p]laintiff did not sufficiently and specifically allege that any of MFW’s” procedural protections “were absent from the merger” and review under the business judgment standard was appropriate.

This case establishes important precedent for future corporate transactions, and provides a roadmap to corporate attorneys structuring going-private transactions involving controlling shareholders under New York law.  The case also provides important guidance for practitioners structuring transactions outside New York and Delaware because the highest courts in two states now have the same standard for review of going-private transactions.

In addition to Mr. Mundiya, partners Sameer Advani and Benjamin McCallen and associates Elizabeth Roache and Maxwell Bryer represented Kenneth Cole in the litigation.