In a stockholder challenge to a going-private merger by a controlling stockholder to buy out minority stockholders, the operative standard of review is ordinarily the most rigorous judicial review, entire fairness.
To avoid the rigorous standard of review, a merger must be structured in a way that meets the requirements set forth by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp.
Under the MFW requirements, a controlling stockholder must condition the merger on both approval of an independent, adequately-empowered special committee of the board that fulfills its duty of care in negotiating a fair merger price, and the uncoerced, informed vote of a majority of the minority disinterested, independent stockholders. If these requirements are satisfied, the business judgment rule applies.
In a recent decision, the Delaware Court of Chancery held that a squeeze-out merger of the minority stockholders by the controlling stockholder of Books-A-Million, Inc. satisfied the MFW requirements, and therefore, applied the business judgment rule.
In finding that the special committee was independent and exercised due care in negotiating a fair merger price under MFW, the Court reasoned that a controlling stockholder does not breach a fiduciary duty merely by offering to buy out minority stockholders at a lower price than a price offered by a third party to buy the entire company.
In its analysis, the Court explained the obligations of a controlling stockholder and board in connection with a proposed squeeze-out merger to buy out the minority stockholders when faced with a third-party, offering a higher price than the controller, to buy the entire company.
First, the Court found that the controlling stockholder did not have a fiduciary duty to sell its shares or controlling interest to facilitate a sale of the Company to the third party.
In short, a controlling stockholder does not have any fiduciary duty to sacrifice its own financial interest in a company for the sake of minority stockholders.
The Court further concluded that a controlling stockholder’s mere offer to buy out minority stockholders at a substantial premium to the market price of the Company, but at a lower price than the price offered by the third party to buy the entire company, did not breach its fiduciary duties.
The Court reasoned that a third-party’s price to buy the entire Company would typically be higher to account for the premium to purchase control of the Company.