In In re MFW Shareholders Litigation, No. 6566-CS, 2013 Del. Ch. LEXIS 135 (Del. Ch. May 29, 2013), the Delaware Court of Chancery used the business judgment rule in reviewing a going-private transaction with a controlling shareholder who employed two separate procedural safeguards to protect the minority shareholders. Previously, in its 1994 Kahn v. Lynch decision, the Delaware Supreme Court held that the burden of proving the entire fairness of a transaction shifts from the defendant to the plaintiff shareholder where an independent special committee or a majority of the minority shareholders approve a merger with a controlling shareholder. The Delaware courts, however, had not previously determined the proper standard of review for a going-private merger with a controlling shareholder when the controlling shareholder employs both procedural safeguards. Squarely faced with that issue, Chancellor Strine held that when a going-private merger is conditioned on both (i) the negotiation and approval of an independent special committee properly empowered to reject the transaction and (ii) the approval of a fully informed, uncoerced majority-of-the-minority vote, the court should apply the business judgment rule standard of review.
The court first explained that there were no disputed facts that the special committee was independent, was fully empowered to select its own advisors and reject the transaction, and met its duty care. Moreover, there were no disputed facts that the vote of the minority shareholders was informed and uncoerced. Therefore, after determining that no binding precedent existed, the court applied the business judgment rule and granted the defendants motions for summary judgment. The decision to use the business judgment rule was premised mostly on the notion that its application would incentivize controlling shareholders to provide for both procedural mechanisms, which when used together will provide minority shareholders with the greatest amount of protection. It remains to be seen, however, whether this decision will endure any appellate review.
