M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, August 20, 2013

Controlling shareholders and BJR

More clarity on under what conditions a transaction involving a controlling shareholder can get business judgment review.  In MFW Shareholder Litigation Chancellor Strine laid out guidance about under what conditions a controller can expect business judgment review for a transaction with the corporation. Two weeks ago, Vice Chancellor Noble handed down a decision in SEPTA v Volganau in which he dealt with a related question – under what circumstances is a transaction entitled to business judgment review when that transaction involves a controller and a sale of the corporation to a third party. He also provides some context with a comparison to MRW:

B. A Note on In re MFW Shareholders Litigation As an initial matter, the Court’s recent decision in In re MFW Shareholders Litigation (“MFW”)82 illuminates many of the procedural protections at issue in this case. For the first time, the Court addressed the question whether, and under what conditions, a merger between a controlling stockholder and its subsidiary could be reviewed under the business judgment rule, as opposed to the entire fairness standard. The Court held that the business judgment rule could apply if all of the following conditions were satisfied:(1) the controlling stockholder at the outset conditions the transaction on the approval of both a special committee and a non-waivable vote of a majority of the minority investors; (2) the special committee was independent, (3) fully empowered to negotiate the transaction, or to say no definitively, and to select its own advisors, and (4) satisfied its requisite duty of care; and (5) the stockholders were fully informed and uncoerced.83 In concluding that this structure would benefit minority stockholders, the Court explained:

[S]tockholders get the benefits of independent, empowered negotiating agents to bargain for the best price and say no if the agents believe the deal is not advisable for any proper reason, plus the critical ability to determine for themselves whether to accept any deal that their negotiating agents recommend to them.84

The Court further reasoned that, because these procedural protections had the effect of replicating an arms’ length transaction, they had a “cleansing” effect on the transaction that justified judicial review under the deferential business judgment rule.85 Unlike MFW, which involved a controlling stockholder on both sides of the transaction, this case involves a merger between a third-party and a company with a controlling stockholder. Despite SEPTA’s attempt to show otherwise, Volgenau is not a buyer in this transaction. As a seller, his interest is generally aligned with that of minority stockholders to the extent that he receives equal consideration for his shares. But as this Court has observed before, a controlling stockholder may, even in this context, inappropriately influence the outcome of the sale process:

[I]t is . . . true that [a controlling stockholder] and the minority stockholders [are] in a sense competing for portions of the consideration [that the third-party is] willing to pay to acquire [the company] and that [the controlling stockholder] . . . could effectively veto any transaction. In such a case it is paramount . . . that there be robust procedural protections in place to ensure that the minority stockholders have sufficient bargaining power and the ability to make an informed choice of whether to accept the third-party’s offer for their shares.86

Hammons sets forth the procedural protections necessary for a third-party transaction involving a controlling shareholder to qualify for review under the business judgment rule: (1) the transaction must be recommended by a disinterested and independent special committee, (2) which has “sufficient authority and opportunity to bargain on behalf of minority stockholders,” including the “ability to hire independent legal and financial advisors[;]” (3) the transaction must be approved by stockholders in a non-waivable majority of the minority vote; and (4) the stockholders must be fully informed and free of any coercion.



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