Delaware's reputation as a corporate tax haven is not news, nor is the amount of companies that incorporate in Delaware (more than half of Fortune 500 companies). What is news is this: the Delaware Supreme Court recently adopted a new standard of review for certain kinds of buyouts and mergers.
Do we have your attention now?
"Novel Question of Law"
In a case instigated by the merger of Ron Perelman's M&F with M & F Worldwide, the Delaware Supreme Court had to determine what the proper standard of review was for a "private merger conditioned upfront by the controlling stockholder on approval by both a properly empowered, independent committee and an informed, uncoerced majority-of-the-minority vote."
The Old Standard -- Entire Fairness
Normally, in the case of a controlling shareholder purchasing the remaining shares, the entire fairness standard would apply, and the defendant (usually the controlling shareholder) would have the burden of proof. Now, in cases where a particular set of circumstances are met, the business judgment rule will apply, and the burden of persuasion would shift back to plaintiffs.
The New Standard -- Business Judgment Rule
For "mergers between a controlling stockholder and its corporate subsidiary" the standard of review is business judgment only "where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders."
Advising Your Clients in Event of Merger
The Court noted that the business judgment rule
will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.
Therefore, if your company is a controlling shareholder, and is going to engage in this type of merger, you must be sure that each of these factors is met. On the flip side, if your company is the one whose shares are getting purchased, if all of these factors are not met, the minority shareholders are entitled to the entire fairness standard of review in litigation, which would put the burden of persuasion on the controlling shareholder.
As an in-house attorney, it's nice to have an understanding of M&A basics, and you always want to be sure that your company's executives don't pull a Zuckerberg. But for any in-house attorney of a Delaware corporation, this case is a must read, as it will surely affect shareholder suits for years to come.
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