Delaware Supreme Court Adopts New Standard of Review for Buyouts - U.S. Third Circuit
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Delaware Supreme Court Adopts New Standard of Review for Buyouts

It's not often that we review state Supreme Court cases, but when the court is the Delaware Supreme Court, and that court adopts a new standard of review to apply to certain types of buyouts hat will likely affect many U.S. corporations -- we listen.

The Deal

The present case that brought about an upheaval in Delaware corporate law revolves around Ronald Perelman's corporate universe. Ronald Perelman owns MacAndrew & Forbes, which in turn owned a 43% stake in MFW. In 2011, Perelman began exploring the opportunity to take MFW private and received independent valuations that MFW stock was worth between $10 and $32.

The day before Perelman made his offer to the MFW board to buy the remaining stock, the stock was valued at $16.96. Perelman's offer was for $24/stock, and stipulated that -- at the outset -- the sale must be "approved by a special committee" and required "approval of a majority of the shares of the Company not owned by M & F or its affiliates."

A special committee of independent directors was formed and they agreed to $25 per share, and a majority (of the minority shareholders) voted for the merger. A group of shareholders sought to enjoin the transaction, and when the transaction was completed, they then sought post-closing relief. The Court of Chancery applied the business judgment rule and granted Perelman's motion for summary judgment.

The New Standard

On appeal, the Delaware Supreme Court had a "novel question of law" to answer, namely, "what standard of review should apply to a going 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 court agreed with the Court of Chancery that the business judgment rule was the correct standard of review.

Normally, the "entire fairness" standard would apply, but "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" the "approval process replicate[s] those that characterize a third-party merger."

Implications

Though just a Delaware Supreme Court case, when so many companies are incorporated in Delaware, this decision will have far-reaching, national implications. Professor Brian Quinn, of Boston College of Law, noted, "There is a whole business on the plaintiffs side looking for these type of cases and suing, knowing there was settlement value," and that shareholders in future lawsuits will see a "'markedly' diminished settlement value," reports Reuters. In effect, more transactions will move forward, and weak cases won't last very long.

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