Special Committees

Delaware Supreme Court Tells Controlling Shareholders “If You Look Out For Your Minority, We’ll Look Out For You”

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On March 14, 2014, the Delaware Supreme Court unanimously affirmed an important Delaware Court of Chancery decision issued in 2013 that offered a roadmap to companies and their directors on how to obtain the protections of the deferential business judgment rule when entering into a change-in-control transaction with a controlling stockholder.  As we discussed previously, in In re MFW Shareholders Litigation, then-Chancellor (now Chief Justice) Strine held as a matter of first impression that the deferential business judgment rule – as opposed to the more onerous “entire fairness” – standard of review should apply to a merger with a controlling stockholder where (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.
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Going-Private Transaction With a Controlling Stockholder – What Standard of Review Applies?

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Chairs Around a Table

We previously discussed how important a special negotiating committee of independent directors can be when defending against stockholder challenges to change-of-control transactions – particularly for going private transactions with controlling stockholders, which usually require boards to be able to prove the “entire fairness” of the transaction. This week, in an important decision that may reach the Delaware Supreme Court, In re MFW Shareholders Litigation, the Delaware Court of Chancery again affirmed the importance of special committees in those circumstances, and offered a road map to companies and controlling stockholders on how to structure going private transactions.

Nearly two decades ago, in Kahn v. Lynch, the Delaware Supreme Court held that where (1) a special committee of independent directors or (2) a majority of the non-controlling stockholders approves a merger with a controlling stockholder, it shifts the burden of proving the entire fairness of the transaction from the defendants to the stockholder challenging the transaction. Last year, in Americas Mining Corp. v. Theriault, the Delaware Supreme Court reiterated that the use of a properly functioning special committee of independent directors is an integral part of the best practices that are used to establish the entire fairness of a merger with a controlling stockholder. READ MORE →

“We’re Considering Selling the Company – How Can a Special Committee Help?”

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Chairs Around a Table

In any change-of-control business transaction, the decision by the target company’s board of directors to approve the deal is subject to heightened scrutiny by the courts. These days, virtually every M&A deal is sure to attract at least one strike suit challenging the board’s decision, so it is essential that the board’s decision-making process be robust and untainted by any conflicts of interest.

One way in which a board can insulate its decision-making process is to employ a special committee of independent, outside directors to evaluate and negotiate any potential sale. Although boards are not required by law to use special committees when brokering change of control transactions, Delaware courts have repeatedly held that the use of a special committee can be powerful evidence of a fair and adequate process. That is especially true where (i) the contemplated transaction is with a controlling stockholder or (ii) a majority of the directors are conflicted, two situations where courts will employ the even-more exacting “entire fairness” standard of review. As the Delaware Supreme Court recently noted, “the effective use of a properly functioning special committee of independent directors” is an “integral” part “of the best practices that are used to establish a fair dealing process.” READ MORE →