September 8, 2010
A Unified Standard for Controlling Shareholders
I don't know how this one slipped by me. Early in July, Vice Chancellor Laster certified an interlocutory appeal by the defendants in the In re CNX Gas Corporation Shareholders Litigation (May 25, 2010 memo opinion) case. At issue was VC Laster's application of VC Strine's "unified standard" in the context of a controlling shareholder's unilateral freeze-out of the minority. VC Chancellor Laster certified the following question: "[A]re voluntary non-coercive tender offers made with full disclosure by controlling stockholders of Delaware corporations subject to entire fairness review?"
In his memo opinion in May, VC Laster suggested that the issue of the standard of review was ripe for resolution by the Supreme Court and practically invited the defendants to appeal. They did. He certified their interlocutory appeal and it went to the Delaware Supreme Court. The court promptly refused to hear the case ... well, not promptly, they waited two days.
While the Supreme Court refused to resolve the ambiguities in the law, I guess the good news is that the the decision leaves VC Laster's opinion and application of the "Cox Communications" test in place. That test says "if a first-step tender offer is both (i) recommended by a duly empowered special committee of independent directors and (ii) conditioned on the affirmative tender of a majority of the minority shares, then the business judgment standard of review presumptively applies. If either requirement is not met, then the transaction is reviewed for entire fairness."
In short, if practitioners begin to incorporate the Cox Communications test into their transaction planning, it suggests that controlling shareholders should be able to structure going private transactions around many non-meritorious lawsuits.
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