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Keywords

defendantsummary judgmentfiduciaryfiduciary duty
defendantappealduty of care

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Kahn v. M & F Worldwide Corp., 88 A.3d 635

Facts

The case arose from a 2011 acquisition by MacAndrews & Forbes Holdings, Inc. of the remaining common stock of MFW, a company in which it already held a 43% stake. The merger was contingent upon the approval of an independent special committee and a majority vote from minority stockholders. After the merger was approved by 65.4% of minority stockholders, minority shareholders sought post-closing relief, alleging breaches of fiduciary duty by the controlling stockholder and the subsidiary's directors. The Court of Chancery found that the conditions for business judgment review were satisfied and granted summary judgment for the defendants.

This is an appeal from a final judgment entered by the Court of Chancery in a proceeding that arises from a 2011 acquisition by MacAndrews & Forbes Holdings, Inc. (“M & F” or “MacAndrews & Forbes”)—a 43% stockholder in M & F Worldwide Corp. (“MFW”)—of the remaining common stock of MFW (the “Merger”).

Issue

What standard of review should apply to a going-private merger between a controlling stockholder and its corporate subsidiary when the merger is conditioned upon the approval of an independent special committee and the uncoerced, informed vote of a majority of minority stockholders?

This appeal presents a question of first impression: what should be the standard of review for a merger between a controlling stockholder and its subsidiary, where the merger is conditioned ab initio upon the approval of both an independent, adequately-empowered Special Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of the minority stockholders.

Rule

The business judgment standard of review applies to going-private mergers conditioned upon both the approval of an independent, adequately-empowered special committee and the uncoerced, informed vote of a majority of minority stockholders.

The Court of Chancery held that business judgment review, rather than entire fairness, should be applied to a very limited category of controller mergers.

Analysis

The court determined that the merger met the necessary conditions for business judgment review, as the special committee was independent and empowered to negotiate effectively, and the minority stockholders voted without coercion. The court emphasized that the dual procedural protections provided a strong incentive for the controlling stockholder to ensure a fair process, thus replicating the characteristics of an arm's-length transaction.

The Court of Chancery held that, rather than entire fairness, the business judgment standard of review should apply 'if, but only if: (i) the controller conditions 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 acts with care; (v) the minority vote is informed; and (vi) there is no coercion of the minority.'

Conclusion

The Supreme Court affirmed the Court of Chancery's decision, holding that the business judgment standard of review was appropriate for the merger in question, and that the defendants had met the necessary conditions to warrant summary judgment.

1 We hold that business judgment is the standard of review that should govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.

Who won?

MacAndrews & Forbes Holdings, Inc. and the subsidiary's directors prevailed because the court found that the merger was conducted under the appropriate procedural protections, satisfying the business judgment standard.

The Defendants argue that the judicial standard of review should be the business judgment rule, because the Merger was conditioned ab initio on two procedural protections that together operated to replicate an arm's-length merger.

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