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Delaware Court Applies Entire Fairness Standard of Review to a Sale to a Third Party
When the Company Has a Controlling Shareholder

By David J. Berger, Lawrence Chu, and Neela Morrison*
The M&A Lawyer, November/December 2009, at 19

The Delaware Court of Chancery recently issued an interesting opinion that
provides additional guidance for structuring transactions to acquire companies with
controlling stockholders. In a case arising out of the sale of John Q. Hammons Hotels, Inc.
(JQH), the court held that while the stringent entire fairness standard of review generally
does not apply to companies with a controlling stockholder if the controlling stockholder
was not on both sides of the transaction, the entire fairness standard may apply when the
controlling stockholder and the minority stockholders are competing for the merger
consideration. Because in this case the controlling stockholder was, in a sense, competing
with the minority over how the merger consideration would be divided, the court held
that the transaction must be, at a minimum, "(1) recommended by a disinterested and
independent special committee, and (2) approved by stockholders in a non‐waivable vote
of the majority of all the minority stockholders."1 While the plaintiffs conceded that the
special committee was independent and disinterested, because the majority‐of‐the‐
minority condition was waivable and was based only on those voting (and not all minority
stockholders), the court held that entire fairness applied (even though the condition was
not waived and a majority of all of the minority stockholders did approve the transaction).
The decision is significant because, among other reasons, it applies the entire fairness
standard to a transaction in which the con‐trolling stockholder did not stand on both sides
of the transaction.

* David J. Berger is a partner in the litigation department and a member of the board of directors
at Wilson Sonsini Goodrich & Rosati, based in the firm’s Palo Alto office. Lawrence Chu is a partner in the
M&A practice of Wilson Sonsini and is based in the firm’s San Francisco office. Neela Morrison is an
associate in the M&A practice of Wilson Sonsini and also is based in the firm’s San Francisco office.

1 [In re John Q. Hammons Hotels Inc. Shareholders Litigation, C.A. No. 758‐CC, 2009 Del. Ch. LEXIS
174 (Del. Ch. Oct. 2, 2009). E.K.] The defendants have filed an application for certification of an interlocutory
appeal of the decision. [On October 30, 2009, the Court of Chancery denied the application. On November
23, 2009, the Supreme Court of Delaware refused the interlocutory appeal. E.K.]

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