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Delaware Chancery Court Dismisses Challenge To Controlling Stockholder Take-Private Deal
10/17/2016On October 10, 2016, Vice Chancellor Travis Laster of the Delaware Court of Chancery granted a motion to dismiss in an action against the directors of bookseller Books-A-Million, Inc. and other defendants following a “squeeze-out” merger by the company’s controlling shareholders. In re Books-A-Million, Inc., C.A. No. 11343, (Del. Ch. Oct. 10, 2016). Vice Chancellor Laster found that the complaint did not sufficiently allege deviations from the framework established by the Delaware Supreme Court in Kahn, et al. v. M&F Worldwide Corp. 88 A.3d 635 (Del. 2014) (“M&F Worldwide”). Therefore, the Court reviewed the transaction under the “business judgment rule” and dismissed the complaint.
In the transaction at issue, the family of Books-A-Million’s founder, which held a controlling block of shares, took the company private through a “squeeze-out” merger, converting minority shareholders’ stock into the right to receive a cash payment of $3.25 per share, subject to appraisal rights. Plaintiffs contended that defendant directors breached their fiduciary duties to minority shareholders by approving this transaction over a competing bid of $4.21 per share received from a third party (“Company Y”).
Under Delaware law, this type of controlling shareholder transaction is typically subject to review based on a heightened “entire fairness” test unless it follows the framework established in M&F Worldwide, in which case the transaction is reviewed under the more deferential “business judgment rule.” Designed to prevent majority shareholders from abusing their power, the framework requires the transaction to be approved by both an independent special committee of the board—with access to its own advisors and the ability to definitively reject the transaction—and a vote of the majority of minority (i.e., non-controlling) shareholders. It also requires that the special committee meet its duty of care in negotiating the transaction and that the vote of the minority stockholders be informed and not coerced.
Significantly, Vice Chancellor Laster held that compliance with the M&F Worldwide framework “can be tested on a motion to dismiss,” if “adherence to the elements” is described “in a public way suitable for judicial notice, such as board resolutions and a proxy statement.” Here, the Court relied heavily on the proxy and held that “the allegations of the Complaint do not support a reasonably conceivable inference that any of the M&F Worldwide conditions were not met” and, therefore, “[t]he business judgment rule . . . applies.”
Specifically, the Court rejected plaintiffs’ allegations that the special committee was not independent, that it acted in bad faith, and that a proper exercise of fiduciary duty would require the acceptance of Company Y’s bid. As to independence, the Court found that the special committee had not been “tainted” when another director merely sat in on the presentation of a fairness opinion by the independent committee’s financial advisor. Regarding plaintiffs’ contention that the higher share price in Company Y’s competing offer demonstrated that defendants acted in bad faith, Vice Chancellor Laster explained that the price terms were not directly comparable because that offer reflected a “control premium,” which need not have been included in the offer by the controlling shareholders. Pointing, among other things, to the special committee’s thirty-three meetings and its rejection of an earlier bid by the controlling shareholders, Vice Chancellor also found that the Complaint failed to demonstrate a breach of the duty of care because it did not “allege[] facts supporting a reasonably conceivable inference that the directors were grossly negligent.”
The application of the M&F Worldwide framework at the motion to dismiss stage is an important development. Companies considering controlling shareholder take-private transactions might find utility not only in adhering to the M&F Worldwide framework but also to documenting that adherence in the proxy and in board resolutions so as to facilitate judicial evaluation early in any litigation that may arise.
