Delaware Chancery Court Establishes Procedural Framework For Obtaining Business Judgment Review For Going Private Transaction Sponsored By Majority Stockholders

In In re MFW Shareholder Litigation, C.A. No. 6566-CS, 2013 WL 2436341 (Del. Ch. May 29, 2013), the Delaware Court of Chancery analyzed one of the most important open questions of Delaware corporate law: whether it is possible for majority stockholders to structure a going private transaction to avoid "entire fairness" review by the Court and instead have the transaction be reviewed under the more deferential "business judgment" standard. After carefully considering precedent and scholarly commentary on this issue, the Court of Chancery concluded that majority stockholders sponsoring a going private transaction can obtain "business judgment" review of the transaction if:

the controlling stockholder conditions the transaction on the approval of both (i) a special committee of the board of directors and (ii) a majority of the minority stockholders; the special committee is truly independent; the special committee is empowered freely to select its own advisors and to say "no" to the transaction definitively; the special committee meets its fiduciary duty of due care; the vote of the minority stockholders is fully informed; and minority stockholders are not coerced in connection with the vote. Although this decision provides majority stockholders with a clear procedural framework for how to structure a going private transaction to avoid "entire fairness" review, some uncertainty will remain until the Delaware Supreme Court rules on this issue.

M&F Worldwide ("MFW") is a holding company incorporated in Delaware engaged in a wide variety of businesses. MFW was 43.4% owned by MacAndrews & Forbes, which was in turn owed by Ron Perelman. In May 2011, Perelman began to explore the possibility of taking MFW private by merging it with MacAndrews & Forbes. Perelman then sent a proposal to MFW's board offering to purchase its shares for $24 in cash. Notably, the proposal stated, among other things:

We will not move forward with the transaction unless it is approved by . . . a special [independent] committee. In addition, the transaction will be subject to a nonwaivable condition requiring the approval of a majority of the shares of the Company not owned by M&F or its affiliates.

In response to the offer, the independent directors of MFW decided to form a special committee to further evaluate Perelman's offer. The independent directors specifically empowered the special committee to (i) perform such investigations as it deemed appropriate; (ii) evaluate...