Last month, I received my copy of Business Organizations in Focus in the mail from Wolters Kluwer. I am incredibly grateful to have had the opportunity to work on this book with my wonderful co-author Deborah Bouchoux. Every so often, I will post about recent developments relevant to the book and to the teaching of business organizations. Please let me know if you have any questions or comments!
This purpose of this book update post is to alert readers to In re Books-A-Million, Inc. Stockholders Litigation, C.A. No. 11343-VCL (Del. Ch. Oct. 10, 2016), a recent decision from the Delaware Chancery Court in which Vice Chancellor Laster addressed issues relating to the obligations of a controlling stockholder in so-called going private transactions. The post relates to the material discussed in Chapter 11 (Changes in Corporate Structure and Corporate Combinations), and specifically to the discussion at pp. 664-679 concerning Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014).
In a going private transaction, a corporation’s controlling shareholder seeks to buy out minority shareholders via a statutory merger. See Del. Code Ann. tit. 8, § 251(a)–(c). Traditionally, Delaware courts subjected going private transactions to review under the entire fairness standard. The entire fairness standard is the highest level of scrutiny applicable to takeover challenges under Delaware law. It requires a reviewing court to evaluate the fairness of both the price (via the court’s own valuation assessment) and the process/course of dealing (focusing on the timing, structure, negotiation and disclosures, approval process, etc.) leading up to a challenged transaction. See Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983). Delaware courts initially placed the burden of demonstrating entire fairness upon the controlling shareholder-defendant. In its 1994 decision Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1117 (Del. 1994), however, the Delaware Supreme Court left the entire fairness in place, but held that controller-defendants could shift the burden of persuasion under entire fairness review to plaintiffs by showing that the transaction was either (i) negotiated by a well-functioning special committee of independent directors or (ii) conditioned on the approval of a majority of the minority shareholders. The applicable standard of review for transactions employing both procedural devices remained an open question.