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Delaware Court of Chancery Extends Business Judgment Protection to Control
Shareholders Selling to a Third Party
By Theodore N. Mirvis, Paul K. Rowe, Andrew J. Nussbaum, Wachtell, Lipton,
Rosen and Katz, August 21, 2017
In 2014, the Delaware Supreme Court ruled that a control stockholder buying out
the public minority interest could achieve the safe haven of business judgment review,
provided that the controller structured the transaction to provide certain protections,
notably special committee approval, full disclosure and a majority-of-minority vote
condition. Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) ("MFW").…
While MFW provided a clear path for controllers pursuing "squeeze out"
transactions, its more general application to controller conflicts has not been addressed
until now. The Court of Chancery has just issued an opinion holding that the presence of
the three cleansing mechanisms identified in MFW will provide business judgment
protection to controllers in contexts outside of squeeze-outs. In re Martha Stewart Living
Omnimedia, Inc. Shareholders Lit., C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017) ("MSLO").
In the MSLO case, stockholder plaintiffs contended that Delaware law required
the application of the stringent entire fairness standard to employment and intellectual
property rights agreements that the third-party buyer of MSLO negotiated with Martha
Stewart, who controlled MSLO. The plaintiffs alleged that these personal arrangements
"diverted" merger consideration to the controller from the public, even though Ms.
Stewart received the same stated price per share as the public stockholders.
Ms. Stewart had agreed to structure a sale process for MSLO that included the
three MFW features. Accordingly, the Court held that claims that she had breached any
duties to stockholders were unfounded, and that the stockholder claims should be
dismissed under the business judgment rule. Describing the fact pattern as a "one-sided
conflict transaction" because the buyer was unaffiliated, the Court applied the reasoning
of MFW, thereby rewarding Ms. Stewart’s disavowal of her control power with dismissal
of the stockholder challenge.
The MSLO decision is clear evidence that the utility of the MFW approach for
controllers is broad indeed. Despite the potential for conflict when a controlled company
is sold or its ownership restructured, Delaware appears committed to providing strong-
form protection against litigation challenges to many types of transactions structured
along MFW lines.
209
Shareholders Selling to a Third Party
By Theodore N. Mirvis, Paul K. Rowe, Andrew J. Nussbaum, Wachtell, Lipton,
Rosen and Katz, August 21, 2017
In 2014, the Delaware Supreme Court ruled that a control stockholder buying out
the public minority interest could achieve the safe haven of business judgment review,
provided that the controller structured the transaction to provide certain protections,
notably special committee approval, full disclosure and a majority-of-minority vote
condition. Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) ("MFW").…
While MFW provided a clear path for controllers pursuing "squeeze out"
transactions, its more general application to controller conflicts has not been addressed
until now. The Court of Chancery has just issued an opinion holding that the presence of
the three cleansing mechanisms identified in MFW will provide business judgment
protection to controllers in contexts outside of squeeze-outs. In re Martha Stewart Living
Omnimedia, Inc. Shareholders Lit., C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017) ("MSLO").
In the MSLO case, stockholder plaintiffs contended that Delaware law required
the application of the stringent entire fairness standard to employment and intellectual
property rights agreements that the third-party buyer of MSLO negotiated with Martha
Stewart, who controlled MSLO. The plaintiffs alleged that these personal arrangements
"diverted" merger consideration to the controller from the public, even though Ms.
Stewart received the same stated price per share as the public stockholders.
Ms. Stewart had agreed to structure a sale process for MSLO that included the
three MFW features. Accordingly, the Court held that claims that she had breached any
duties to stockholders were unfounded, and that the stockholder claims should be
dismissed under the business judgment rule. Describing the fact pattern as a "one-sided
conflict transaction" because the buyer was unaffiliated, the Court applied the reasoning
of MFW, thereby rewarding Ms. Stewart’s disavowal of her control power with dismissal
of the stockholder challenge.
The MSLO decision is clear evidence that the utility of the MFW approach for
controllers is broad indeed. Despite the potential for conflict when a controlled company
is sold or its ownership restructured, Delaware appears committed to providing strong-
form protection against litigation challenges to many types of transactions structured
along MFW lines.
209
