Kahn v. M & F Worldwide Corp.

Ordinarily, a merger in which a controller acquires the minority’s shares is reviewed for entire fairness because the controller’s influence may compromise the statutory protections ordinarily supplied by disinterested director approval and stockholder approval. Under Kahn v. Lynch, use of either an effective independent committee or an informed majority-of-the-minority vote shifts the burden of persuasion within entire-fairness review, but does not itself change the standard of review.

A transaction that employs both protections is fundamentally different. A genuinely independent committee with authority to negotiate and definitively reject the deal supplies an arm’s-length bargaining agent, while a nonwaivable majority-of-the-minority condition prevents the controller from using its voting power to force the transaction. Together, those protections replicate the disinterested board and stockholder approvals characteristic of an arm’s-length third-party merger.

The dual-protection structure gives controllers a strong incentive to provide minority stockholders the most protective process. Because the controller knows from the beginning that it must satisfy both an independent negotiator and the unaffiliated stockholders, it cannot use a late-stage minority vote merely as leverage to close a deal that the committee did not truly support.

Accordingly, business-judgment review is available only when: the controller conditions the deal from the outset on approval by both a special committee and a majority of the minority; the committee is independent; the committee may freely choose advisers and say no definitively; the committee acts with due care in negotiating a fair price; the minority vote is informed; and the minority is uncoerced. If any condition is genuinely disputed after discovery, the case proceeds under entire-fairness review. A controller that uses only one protection remains within entire fairness, though the burden may shift under Lynch.

Delaware independence turns on whether a director is so beholden to, or under the influence of, an interested party that the director’s discretion is sterilized. Past business dealings, social connections, or professional relationships do not alone establish a lack of independence; the plaintiff must show that the alleged tie was material to the particular director.

The plaintiffs challenged committee members Carl Webb, Viet Dinh, and Martha Byorum based on prior dealings with Perelman-related entities. But Webb’s business relationship with Perelman had ended years earlier; Dinh’s law firm had received limited, inactive, and undisputedly immaterial engagements; and Byorum’s earlier banking and advisory work was remote and unsupported by evidence of material personal dependence.

After extensive discovery, the plaintiffs offered no concrete evidence comparing the challenged relationships with the directors’ economic circumstances or otherwise showing that the relationships could have affected their impartiality. The Court therefore upheld summary judgment on the committee’s independence.

The board resolution authorized the committee to investigate, evaluate, negotiate, recommend, or decline the proposal; retain its own advisers; and determine not to pursue the transaction. MacAndrews publicly committed not to proceed without committee approval. Thus, the committee did not face the prospect that the controller could bypass it and take a coercive proposal directly to minority stockholders.

The committee retained independent legal and financial advisers, met eight times, obtained updated management projections insulated from MacAndrews influence, reviewed several valuation methods, considered strategic alternatives and possible buyers, and examined whether divestitures might yield superior value. Although the committee could not practically sell MFW without MacAndrews agreeing to sell its controlling block, it could and did investigate the value of alternatives.

The committee rejected the initial $24 offer, countered at $30, and ultimately accepted MacAndrews’s stated best-and-final offer of $25 after Evercore concluded that the price was fair under accepted valuation methodologies. The record showed attentive consideration of deteriorating business results and market conditions, not a perfunctory process. The plaintiffs identified no evidence from which a factfinder could conclude that the committee failed its duty of care.

The proxy disclosed the committee’s negotiations, including its rejection of the initial $24 proposal and its $30 counteroffer; the updated, lower projections; Evercore’s valuation analyses and ranges; and the basis for the committee’s recommendation. Minority stockholders therefore received material information about the process and the financial basis for the $25 price.

The plaintiffs did not identify a disclosure defect or any coercive conduct. Their broader concern that arbitrageurs may favor transactions offering a premium challenged investors’ motives, not the voluntariness or informed nature of the vote. More than 65% of the minority shares approved the merger.

The record established each prerequisite for business-judgment review: the controller imposed both conditions from the outset, the committee was independent and fully empowered, the committee acted with due care, and the minority vote was informed and uncoerced.

Under business-judgment review, the merger could be challenged only if no rational person could have believed that it was favorable to the minority stockholders. Given the committee’s negotiations, Evercore’s fairness opinion and valuation analyses, and the substantial minority approval, that demanding standard could not be met. The Court therefore affirmed summary judgment.