Harmonizing going private transactions: the Delaware Chancery Court gives controlling stockholders a clearer road map for taking a corporation private.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

FOR THE LAST SEVERAL YEARS, a stockholder who controlled a Delaware corporation (but did not own all of the stock) has been in a difficult position if he wanted to acquire the remaining shares he did not own. Different standards of legal review potentially applied to a negotiated merger than to a tender offer.

The 2010 case, In re CNX Gas Corporation Shareholders Litigation, established that the Delaware courts would apply business judgment rule review in the case of a controlling stockholder tender offer, so long as certain procedural safeguards were in place to protect the minority stockholders.

Access to this business judgment rule standard for review has made a tender offer followed by a short form merger an appealing structure for going private transactions because when the directors' actions inevitably are challenged in court, the board has a good chance of getting the case dismissed at an early stage of the proceeding.

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By contrast, there has been uncertainty whether the more demanding "entire fairness" test enunciated in 1994 in Kahn v. Lynch applies to all negotiated mergers with controlling stockholders. Under this factually intensive test, defendants are required to show that the transaction, including both the process used by the board and the price paid, was entirely fair to the minority stockholders. If the defendant had required approval of the merger by either a properly functioning special committee or a majority of the noncontrolling stockholders, it would be able to shift the burden of proof to the plaintiff, who would have to prove that the transaction was unfair.

In either case, whether the burden of proof stayed with the defendant or shifted to the plaintiff, this analysis generally involves protracted litigation and concomitant expenses. It has been unclear whether a negotiated merger could ever be eligible for business judgment rule review.

In the recent case In re MFW Shareholders Litigation, Chancellor Leo Strine continued his efforts to rationalize the law in this area. In In re MFW, a controlling stockholder offered to purchase the remaining equity of the corporation in a going-private merger transaction. Upfront, he conditioned the transaction on approval by both an independent special committee and the majority of the minority stockholders, which approvals were subsequently obtained.

The court held that a merger in such a context should be reviewed under the business judgment rule...