Source: http://clsbluesky.law.columbia.edu/2017/03/07/shearman-sterling-discusses-the-cleansing-effect-of-stockholder-ratification/
Timestamp: 2019-04-24 08:30:34+00:00

Document:
Similarly, in New York, transactions with controlling stockholders have generally been subject to entire fairness review. In Alpert v. 28 Williams St. Corp., the Court of Appeals of the State of New York affirmed, in reviewing a freeze-out merger, that “the essence of the judicial inquiry is to determine whether the transaction, viewed as a whole, was “fair” as to all concerned.”10 Similarly to the entire fairness standard promulgated by Delaware courts,11 the concept of fairness in New York involves two components: fair dealing toward minority holders and fair price offered for the minority’s stock.12 This standard of review continued to control in New York until Kenneth Cole,13 when the Court of Appeals followed Kahn v. M&F Worldwide and applied the business judgment rule to a transaction with a controlling stockholder that complied with the MFW Standard.
Similarly, transactions involving the sale of a company for cash (or mostly cash) to someone other than a controlling stockholder were generally subject to the Revlon standard of review.15 However, as made clear in several recent Delaware decisions, these transactions will be protected by the business judgment rule, even if a majority of the board was not disinterested or independent, if such transactions are approved by a fully informed, uncoerced vote of a majority of disinterested stockholders.
In 2014, in KKR Financial,16 the Delaware Court of Chancery reasoned that in transactions not involving a controlling stockholder, the business judgment rule presumption should apply if the board’s decision is approved by a fully informed, uncoerced vote of a majority of disinterested stockholders, even if a majority of the directors approving the transaction are not independent or disinterested. This approach was later confirmed by the Delaware Supreme Court in Corwin v. KKR Financial,17 when the court decided that the fully informed, uncoerced vote by disinterested stockholders restores the presumption of the business judgment rule even in a Revlon merger subject to enhanced scrutiny. In 2016, in Larkin v. Shah,18 the Court of Chancery clarified that the only transactions subject to the entire fairness review that cannot be cleansed by proper stockholder approval are conflicted transactions with controlling stockholders.
These recent cases, while generally consistent with long standing principles of corporate law, clarify and reinforce the notions that, absent a compelling reason for protection, stockholders should be masters of their own destiny when it comes to M&A transactions, while directors should be insulated from an intrusive standard of review when they give stockholders the information necessary to act on an informed basis. This clarity is welcome, as it gives directors the appropriate leeway to propose most transactions, and stockholders the appropriate discretion and responsibility in deciding whether to approve them. However, M&A practitioners should expect that, going forward, plaintiffs will attempt to reclaim a higher standard of review by alleging that stockholders have not been fully informed and/or have been coerced into approving a transaction. Accordingly, transaction participants (and their advisors) should ensure that stockholders are provided with full disclosure regarding all aspects of the transaction, particularly as to conflicts (the “warts and all” approach), and that plaintiffs have no credible basis to argue that stockholders were compelled to approve the transaction presented to them.
1See e.g. Samuel Arsht, The Business Judgment Rule Revisited, 8 Hofstra L. Rev. 93, 97.
2Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000); In re Kenneth Cole Prod., Inc., S’holder Litig., 2016 WL 2350133 (2016) citing Chelrob, Inc. v. Barrett, 293 NY 442, 459-460 (1944) and Auerbach v. Bennett, 47 NY2d 619, 630-631 (1979).
3Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 312 (Del. 2015).
4Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994) citing Weinberger v. UOP, Inc., 457 A.2d 701, 710 (1983); Alpert v. 28 Williams St. Corp., 63 NY2d 557, 569 (1984).
5Kahn, 638 A.2d 1110, 1117 (Del. 1994).
8Kahn v. M&F Worldwide Corp., 88 A.3d 635, 642 (Del. 2014).
9In re Books-a-Million, Inc., 2016 WL 5874974, at *8.
10Alpert v. 28 Williams St. Corp., 63 NY2d 557, 569 (1984).
11Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983).
13In re Kenneth Cole, 2016 WL 2350133, at *12 (2016).
14A transaction may still be subject to an entire fairness review if the plaintiff can plead a reasonably conceivable set of facts that any of the conditions of the MFW Standard are not satisfied. M&F Worldwide Corp., at 645. See also In re Kenneth Cole, at *14. The Court of Chancery confirmed in In re Books-a-Million, Inc., referring to Swomley v. Schlecht, 2014 WL 4470947 (Del. Ch. Aug. 27, 2014), aff’d,128 A.3d 992 (Del. 2015),that the court will apply the business judgment rule at the motion to dismiss stage if the defendants show their adherence to the MFW Standard “in a public way suitable for judicial notice, such as board resolutions and a proxy statement,” unless the plaintiff pleads sufficiently that any conditions of the MFW Standard were not satisfied. In re Books-a-Million, Inc., at *8. Chief Justice Strine in a footnote to the Supreme Court’s December 19, 2016 decision in Employees Retirement System of the City of St. Louis v. TC Pipelines GP, Inc., 2016 WL 7338592 (Del. 2016) confirmed, citing Swomley, that the pleading stage is an appropriate point to determine if a transaction complied with the MFW Standard.
15Transactions involving the sale of control or break-up of a company are subject to Revlon enhanced scrutiny review, which requires the directors’ decisions to be reasonable under the circumstances, but not perfect. Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986).
16In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014).
18Larkin v. Shah, 2016 WL 448 5447, at *13 (Del. Ch. Aug. 25, 2016).
19City of Miami Gen. Employees’ and Sanitation Employees’Ret. Trust v. Comstock, 2016 WL 4464156 (Del. Ch. Aug. 24, 2016), at *22; the decision is currently under review by the Delaware Supreme Court.
20In re Solera Holdings, Inc. S’holder Litig., 2017 WL 57839 (Del. Ch. Jan 5, 2017).
21Comstock, at *22; In re Solera, at *13.
22Singh v. Attenborough (Zale III), 137 A.3d 151 (Del. 2016).
23In re Zale Corp. S’holders Litig., 2015 WL 5853693 (Del. Ch. Oct. 1, 2015).
26In re Volcano Corp. S’holder Litig., 143 A.3d 727, 738 (Del. Ch. 2016).
27In re Volcano Corp. S’holder Litig., C.A. No. 10485-VCM (Del. Feb 9, 2017).
28In re Volcano Corp., 143 A.3d 727, at *750.
29In cases involving defensive actions by a target board of directors, the burden of proof shifts to the defendant to show both (1) that the directors reasonably perceived a threat to the corporation, and (2) that the directors’ defensive responses were proportional to that threat. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
This post comes to us from Shearman & Sterling LLP. It is based on the firm’s article, “Power to the People (and Relief to Directors): New Clarity on the Cleansing Effect of Stockholder Ratification,” dated February 2017 and available here.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.