On Wednesday, Chancellor Leo Strine of Chancery Court gave companies a powerful incentive to build both independent board review and minority shareholder approval into the going-private process, writing new law that should boost shareholder protections. Strine granted summary judgment to M&F Worldwide, finding that the board did not breach its duty to shareholders when it approved a $25 per share offer by MFW’s controlling shareholder, MacAndrews & Forbes (which, in turn, is wholly owned by Ron Perelman). Of much broader significance, the chancellor also said, in a scholarly opinion devoid of the usual Strinian flourishes of rhetoric, that because MFW structured the deal process so that an independent board committee negotiated the transaction and minority shareholders subsequently approved it, the deal should be evaluated under the deferential business judgment standard, not the more rigorous entire fairness standard.
“This conclusion is consistent with the central tradition of Delaware law, which defers to the informed decisions of impartial directors, especially when those decisions have been approved by the disinterested stockholders on full information and without coercion,” Strine wrote. “Not only that, the adoption of this rule will be of benefit to minority stockholders because it will provide a strong incentive for controlling stockholders to accord minority investors the transactional structure that respected scholars believe will provide them the best protection.” And as an added benefit, Strine said, companies that subject going-private deals to the scrutiny of both an independent board committee and a vote of minority shareholders will have an easier time fending off litigation challenges to their transactions by minority shareholders.
Even the chancellor seems sure that his is not the last word on structuring buyouts to receive business judgment deference. He noted several times that he is offering his interpretation of Supreme Court precedent and invited the justices to set him straight if he’s wrong. But in the meantime, corporate lawyers advising on going-private deals will have to think hard about the sale process. And shareholder lawyers will have to think just as hard about whether it makes economic sense to challenge transactions that will be evaluated under the business judgment standard.
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