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In re MFW Shareholders Litigation: Court of Chancery Rules That Dual-Protection Mechanism Results in Business Judgment Review

May 29, 2013

Chancellor Strine granted summary judgment in a stockholder class action brought to challenge a merger of M&F Worldwide Corp. with its controlling stockholder, MacAndrews & Forbes Holdings Inc. In In re MFW Shareholders Litigation, C.A. No. 6566-CS (Del. Ch. May 29, 2013), the Court of Chancery decided a novel question of law, ruling that, “when a controlling stockholder merger has, from the time of the controller’s first overture, been subject to (i) negotiation and approval by a special committee of independent directors fully empowered to say no, and (ii) approval by an uncoerced, fully informed vote of a majority of the minority investors, the business judgment rule standard of review applies.”
 
MacAndrews & Forbes owned 43% of M&F Worldwide and offered to purchase the remaining equity of M&F Worldwide in a going-private merger for $24 per share. From the outset, MacAndrews & Forbes stated that it would not proceed with any such transaction that was not approved by an independent special committee and by a majority of the unaffiliated minority stockholders. The transaction received both approvals.

Stockholder plaintiffs withdrew a motion for preliminary injunction in favor of seeking a post-closing damages remedy for breach of fiduciary duty. After discovery, defendants moved for summary judgment.

The Court of Chancery recognized the well-settled law from the Delaware Supreme Court that approval by either a special committee or a majority of the minority stockholders would shift the burden of proof from the defendants to the plaintiffs, but would not change the standard of review, which remained entire fairness. After extensive review of the Delaware Supreme Court’s precedents, the Court of Chancery concluded that it had never been decided which standard of review would apply if both procedural mechanisms were employed, and that statements in those precedents suggesting application of the entire fairness standard to such a case were dicta. Viewing the issue as open, the Court of Chancery determined that “the rule of equitable common law that best protects minority investors is one that encourages controlling stockholders to accord the minority this potent combination of procedural protections.” Because no factual dispute remained that both mechanisms were employed properly in this transaction, the Court applied the business judgment rule and entered summary judgment for defendants on all counts.