A client memo from Richard, Layton & Finger informs that a new opinion by Chancellor Strine, In re MFW Shareholders Litigation, involved a merger of M&F Worldwide Corp. with its controlling stockholder, MacAndrews & Forbes Holdings Inc.
[In it, Strine] decided a novel question of law, ruling that, “when a controlling stockholder merger has, from the time of the controller’s first overture, been subject to (i) negotiation and approval by a special committee of independent directors fully empowered to say no, and (ii) approval by an uncoerced, fully informed vote of a majority of the minority investors, the business judgment rule standard of review applies.” ...
The Court of Chancery recognized the well-settled law from the Delaware Supreme Court that approval by either a special committee or a majority of the minority stockholders would shift the burden of proof from the defendants to the plaintiffs, but would not change the standard of review, which remained entire fairness. After extensive review of the Delaware Supreme Court’s precedents, the Court of Chancery concluded that it had never been decided which standard of review would apply if both procedural mechanisms were employed, and that statements in those precedents suggesting application of the entire fairness standard to such a case were dicta. Viewing the issue as open, the Court of Chancery determined that “the rule of equitable common law that best protects minority investors is one that encourages controlling stockholders to accord the minority this potent combination of procedural protections.” Because no factual dispute remained that both mechanisms were employed properly in this transaction, the Court applied the business judgment rule and entered summary judgment for defendants on all counts.
The opinion is here. You'll note the references to yours truly's article, The Business Judgment Rule as Abstention Doctrine, 57 Vand. L. Rev. 83 (2004), in footnotes 107 and 147.
The result seeems perfectly sensible. After all, a conflict of interest is just a status--not a crime--and here the conflict has been doubly policed by two distinct independent and disinterested bodies. To require entire fairness even after all that would be to gild the lily to excess. As Strine points out, why would a rational bidder provide such protections if they get no benefit from doing so?
