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Kahn v. M&F Worldwide Corp.: Delaware Supreme Court Affirms In re MFW, Holds that Controlling Stockholder Buyouts Can Receive Business Judgment Review if Conditioned Ab Initio on Dual Procedural Protections

March 14, 2014

In Kahn, et al. v. M&F Worldwide Corp., et al., No. 334, 2013 (Del. Mar. 14, 2014), the Delaware Supreme Court affirmed the Court of Chancery’s decision in In re MFW Shareholders Litigation, 67 A.3d 496 (Del. Ch. 2013) (click here for a summary and copy of the Chancery opinion), which granted summary judgment in favor of a board accused of breaching its fiduciary duties by approving a buyout by a 43.4% controlling stockholder, where the controller committed in its initial proposal not to move forward with a transaction unless approved by a special committee, and further committed that any transaction would be subject to a non-waivable condition requiring the approval of the holders of a majority of the shares not owned by the controller and its affiliates. Stockholder plaintiffs initially sought to enjoin the proposed transaction, but withdrew their preliminary injunction application and instead sought post-closing damage relief. After extensive discovery, the defendants sought summary judgment.

The Court of Chancery held that the transaction could be reviewed under the business judgment standard, rather than entire fairness, and granted the defendants’ motion. On appeal, the Supreme Court affirmed the Court of Chancery’s decision and adopted its formulation of the standard, holding that the business judgment standard of review will be applied in controller buyouts 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 minority vote is informed, and (vi) there is no coercion of the minority.

The Court further held, however, that if “after discovery triable issues of fact remain about whether either or both of the dual procedural protections were established, or if established were effective, the case will proceed to a trial in which the court will conduct an entire fairness review.” The Court also noted that the complaint in the action would have survived a motion to dismiss based on allegations attacking the fairness of the price, which called into question the adequacy of the special committee’s negotiations, thereby necessitating discovery on all of the prerequisites to the application of the business judgment rule.