Co-authored by Martin Q. Ruhaak.

In In re MFW Shareholders Litigation, on May 29 the Delaware Court of Chancery granted summary judgment in favor of MacAndrews & Forbes Holdings Inc. in a class action suit brought by former stockholders of M&F Worldwide Corp. challenging MacAndrews’ going private acquisition of M&F. For the first time, the Delaware Court of Chancery held that the business judgment rule applies to a going private merger “conditioned … on approval by both a properly empowered, independent committee, and an informed, uncoerced majority-of-the-minority vote.”

MacAndrews, which owned approximately 43 percent of M&F’s outstanding common stock, offered to acquire the remaining shares of M&F’s common stock for $24 per share pursuant to an all-cash merger. At the outset of MacAndrews’ negotiations with M&F, MacAndrews insisted that it would not proceed with any transaction unless it was approved by an independent special committee of M&F’s board of directors and subject to a non-waivable condition requiring the approval of a majority of the stockholders unaffiliated with MacAndrews. While the independent special committee rejected the initial $24 per share offer, it ultimately unanimously recommended to the full board the approval of the transaction at a price of $25 per share, and approximately 65 percent of M&F’s minority stockholders approved the transaction. In its analysis, the Delaware Court of Chancery emphasized that the independent special committee could and did select its own advisors and was fully empowered to negotiate or reject the transaction.

Chancellor Strine recognized that, while Delaware law requires that courts scrutinize a going private transaction with a target company’s controlling stockholder under the entire fairness standard of review where the going private transaction is approved either by an independent committee or an uncoerced majority-of-the-minority, the Delaware Supreme Court has not yet decided what standard of review would apply to a transaction subject to both protections. Accordingly, the Delaware Court of Chancery was not obligated to apply the entire fairness standard of review. Chancellor Strine reasoned that a transaction structure that replicates arms’ length bargaining by being conditioned from the outset upon both the approval of an independent special committee and a non-waivable condition requiring the approval of a majority-of-the-minority is fundamentally different from a transaction with only one such protection, and that applying the business judgment rule to a transaction subject to both protections would “encourage controlling stockholders to accord the minority this potent combination of procedural protections.” 

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