August 10, 2020

Volume X, Number 223

August 10, 2020

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Delaware Chancery Court Applies Business Judgment Rule to Going Private Transaction with Controlling Stockholder

In In re MFW Shareholders Litigation, on May 29 the Delaware Court of Chancery granted summary judgment in favor of MacAndrews & Forbes Holdings Inc. in a class action suit brought by former stockholders of M&F Worldwide Corp. challenging MacAndrews’ going private acquisition of M&F. For the first time, the Delaware Court of Chancery held that the business judgment rule applies to a going private merger “conditioned … on approval by both a properly empowered, independent committee, and an informed, uncoerced majority-of-the-minority vote.”

MacAndrews, which owned approximately 43 percent of M&F’s outstanding common stock, offered to acquire the remaining shares of M&F’s common stock for $24 per share pursuant to an all-cash merger. At the outset of MacAndrews’ negotiations with M&F, MacAndrews insisted that it would not proceed with any transaction unless it was approved by an independent special committee of M&F’s board of directors and subject to a non-waivable condition requiring the approval of a majority of the stockholders unaffiliated with MacAndrews. While the independent special committee rejected the initial $24 per share offer, it ultimately unanimously recommended to the full board the approval of the transaction at a price of $25 per share, and approximately 65 percent of M&F’s minority stockholders approved the transaction. In its analysis, the Delaware Court of Chancery emphasized that the independent special committee could and did select its own advisors and was fully empowered to negotiate or reject the transaction.

Chancellor Strine recognized that, while Delaware law requires that courts scrutinize a going private transaction with a target company’s controlling stockholder under the entire fairness standard of review where the going private transaction is approved either by an independent committee or an uncoerced majority-of-the-minority, the Delaware Supreme Court has not yet decided what standard of review would apply to a transaction subject to both protections. Accordingly, the Delaware Court of Chancery was not obligated to apply the entire fairness standard of review. Chancellor Strine reasoned that a transaction structure that replicates arms’ length bargaining by being conditioned from the outset upon both the approval of an independent special committee and a non-waivable condition requiring the approval of a majority-of-the-minority is fundamentally different from a transaction with only one such protection, and that applying the business judgment rule to a transaction subject to both protections would “encourage controlling stockholders to accord the minority this potent combination of procedural protections.” 

Click here to read the opinion.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume III, Number 158


About this Author

Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...

Martin Q. Ruhaak, Katten Muchin Law Firm, private equity transactions lawyer

Martin Ruhaak concentrates his practice on corporate matters, with an emphasis on private equity transactions, mergers and acquisitions, distressed investments and securities matters. He has represented financial sponsors and corporate clients in transactions across a variety of industries, including automotive, financial services, distribution and logistics, technology and government contracting.