Corporations contemplating going private should take note of recent rulings from the Delaware Court of Chancery, which provide clear guidance on how to structure their transactions to reduce the risk of being subjected to the “entire fairness” standard of review.
Several months ago, the Delaware Court of Chancery issued an important MFW decision, in which Chancellor Strine set forth the procedural mechanisms a company can employ so that a going-private transaction with its controlling stockholder can be reviewed under the deferential business judgment rule, as opposed to the more stringent entire fairness standard. In that decision, Chancellor Strine held that the business judgment rule would apply if: (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.
More recently, in SEPTA v. Volgenau, C.A. No. 6354-VCN (Del. Ch. Aug. 5, 2013), Vice Chancellor Noble provided further clarity on when a sale of a company with a controlling stockholder will be entitled to business judgment rule review. In SEPTA, Vice Chancellor Noble applied the business judgment rule and granted summary judgment to the defendants in case that challenged the acquisition of SRA International by Providence Equity Partners. Like the change-in-control transaction in MFW, the change-in-control transaction in SEPTA was negotiated by a disinterested and independent special committee and approved by a majority of the minority stockholders. Unlike MFW, however, where the controlling stockholder was the buyer in the transaction, SEPTA involved a transaction in which a third party was the buyer, and in which the controlling stockholder agreed to roll over a portion of his shares into the merged entity. READ MORE