The Delaware Supreme Court’s recent affirmance in Kahn v. M&F Worldwide, No. 334, 2013 (Del. Mar. 14, 2014),referred to as MFW,allows controlling stockholders to avoid the entire fairness standard of review if at the outset of a self-dealing transaction the controlling stockholder effectively relinquishes control over the outcome to an independent committee of disinterested directors and a nonwaivable, fully informed vote of a majority of the minority stockholders. In that circumstance, reasoned the Supreme Court, the transaction would reflect arm’s-length bargaining and afford an independent majority of the stockholders the opportunity to decide for themselves whether to approve the transaction.
The recent decision in Hamilton Partners v. Highland Capital Management, C.A. No. 6547-VCN (Del. Ch. May 7, 2014), demonstrates that the entire fairness standard of review remains alive and well for transactions where a controlling stockholder does not follow the MFW process. At the same time, a plaintiff who fails to allege that a majority of the directors who approved the transaction was not disinterested or independent or was dominated and controlled by an arguably interested director may not be able to state a claim against a director of the target corporation. Thus, in Hamilton Partners,the court sustained a plaintiff’s complaint against the controlling stockholder but dismissed its complaint against a lone director. The case provides important guidance for plaintiffs and defendants in controlling stockholder transactions regarding the circumstances under which a plaintiff may state a claim.
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