Wednesday, November 12, 2014

Freeze-Out Mergers in Delaware after Kahn v. M&F Worldwide

We are covering freeze out mergers in my corporations class this week, which is great fun (and I even think a few students would agree with me on this).  Thinking about these issues reminded me that I needed to get comfortable with a spring 2014 Delaware Supreme Court opinion in Kahn v. M & F Worldwide Corp., 88 A.3d 635(Del. 2014), which applies the business judgment rule (rather than the entire fairness standard) to review these transactions if certain conditions are met.  The holding is summarized below: 

[I]n controller buyouts, the business judgment standard of review will be applied 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 vote of the minority is informed; and (vi) there is no coercion of the minority.
Kahn at 645.
This case is a great end-of-semester recap on some important themes.  It reviews the role of special committees (something that students can have difficulty conceptualizing outside of the context of derivative suits where they first learn them) as well as summarizes and applies the independence analysis of directors.
To show that a director is not independent, a plaintiff must demonstrate that the director is beholden” to the controlling party or so under [the controller's] influence that [the director's] discretion would be sterilized.. . .The inquiry must be whether, applying a subjective standard, those ties were material, in the sense that the alleged ties could have affected the impartiality of the individual director.
Kahn at 648-649.

The opinion also recaps the duty of care, proxy statements, the cleansing votes of a majority of minority shareholders, as well as provides a useful (and detailed) discussion of arm's length transactions.  In describing the motivations behind deal protections and terms, the court sets up its analysis by analogy to a teenager. The court says that the dual protections considered in this case are good for shareholders, but that without the incentive of the business judgment rule, parties won't agree to them.  
Assume you have a teenager with math and English assignments due Monday morning. If you tell the teenager that she can go to the movies Saturday night if she completes her math or English homework Saturday morning, she is unlikely to do both assignments Saturday morning. She is likely to do only that which is necessary to get to go to the moves--i.e., complete one of the assignments--leaving her parents and siblings to endure her stressful last-minute scramble to finish the other Sunday night. 
This case will likely be added to casebooks, if it isn't already in your supplement.  For further reading, see Barnard Sharfman's case commentary, Kahn v. M&F Worldwide Corporation: A Small but Significant Step Forward in the War against Frivolous Shareholder Lawsuits, appearing in the Journal of Corporation Law.  In this commentary, Sharfman laments that
"Because entire fairness makes it almost impossible for defendants to get the case dismissed prior to trial,  it has made it extremely tempting for plaintiffs’ attorneys, in order to earn attorney’s fees, to automatically file a class action lawsuit in a freeze-out merger without regard to the merits."

The ruling in Kahn changes the defense landscape facilitating defendants' "ability to seek dismissal of the suit prior to trial, thereby 

reducing, at least in theory, the pressure on defendants to automatically seek a settlement even if the suit is without merit."


-Anne Tucker

| Permalink


Post a comment