Opinion ID: 1952521
Heading Depth: 1
Heading Rank: 3

Heading: Entire Fairness Requirement Dominating Interested Shareholder

Text: A controlling or dominating shareholder standing on both sides of a transaction, as in a parent-subsidiary context, bears the burden of proving its entire fairness. Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 710 (1983). See Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 937 (1985). The demonstration of fairness that is required was set forth by this Court in Weinberger: The concept of fairness has two basic aspects: fair dealing and fair price. The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock. However, the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the question is one of entire fairness. Weinberger v. UOP, Inc., 457 A.2d at 711 (citations omitted). The logical question raised by this Court's holding in Weinberger was what type of evidence would be reliable to demonstrate entire fairness. That question was not only anticipated but also initially addressed in the Weinberger opinion. Id. at 709-10 n. 7. This Court suggested that the result could have been entirely different if UOP had appointed an independent negotiating committee of its outside directors to deal with Signal at arm's length, because fairness in this context can be equated to conduct by a theoretical, wholly independent, board of directors. Id. Accordingly, this Court stated, a showing that the action taken was as though each of the contending parties had in fact exerted its bargaining power against the other at arm's length is strong evidence that the transaction meets the test of fairness. Id. (emphasis added). In this case, the Vice Chancellor noted that the Court of Chancery has expressed differing views regarding the effect that an approval of a cash-out merger by a special committee of disinterested directors has upon the controlling or dominating shareholder's burden of demonstrating entire fairness. One view is that such approval shifts to the plaintiff the burden of proving that the transaction was unfair. Citron v. E.I. Du Pont de Nemours & Co., Del.Ch., 584 A.2d 490, 500-02 (1990); Rabkin v. Olin Corp., Del.Ch., C.A. No. 7547 (Consolidated), Chandler, V.C., 1990 WL 47648, slip op. at 14-15 (Apr. 17, 1990), reprinted in 16 Del.J.Corp.L. 851, 861-62 (1991), aff'd, Del.Supr., 586 A.2d 1202 (1990). The other view is that such an approval renders the business judgment rule the applicable standard of judicial review. In re Trans World Airlines, Inc. Shareholders Litig., Del.Ch., C.A. 9844 (Consolidated), Allen, C., 1988 WL 111271, slip op. at 15-16 (Oct. 21, 1988), reprinted in 14 Del.J.Corp.L. 870, 883 (1989). [4] See Cinerama, Inc. v. Technicolor, Inc., Del.Ch., C.A. No. 8358, Allen, C., 1991 WL 111134, slip op. at 47-48 (June 24, 1991), reprinted in 17 Del. J.Corp.L. 551, 570-72 (1992), aff'd in part and rev'd in part on other grounds sub nom. Cede & Co. v. Technicolor, Inc., Del.Supr., 634 A.2d 345 (1993). It is often of critical importance whether a particular decision is one to which the business judgment rule applies or the entire fairness rule applies. Nixon v. Blackwell, Del.Supr., 626 A.2d 1366, 1376 (1993). The definitive answer with regard to the Court of Chancery's differing views is found in this Court's opinions in Weinberger and Rosenblatt. In Weinberger, this Court held that because of the fairness test which has long been applicable to parent-subsidiary mergers, the expanded appraisal remedy now available to shareholders, and the broad discretion of the [Court of Chancery] to fashion such relief as the facts of a given case may dictate, we do not believe that any additional meaningful protection is afforded minority shareholders by the business purpose requirement of the trilogy of Singer [ v. Magnavox Co., Del.Supr., 380 A.2d 969 (1977)], Tanzer [ v. International Gen. Indus., Inc., Del.Supr., 379 A.2d 1121 (1977)], [ Roland Int'l Corp. v. ] Najjar [Del.Supr., 407 A.2d 1032 (1979)], and their progeny. Accordingly, such requirement shall no longer be of any force or effect. Weinberger v. UOP, Inc., 457 A.2d at 715 (citation and footnotes omitted). Thereafter, this Court recognized that it would be inconsistent with its holding in Weinberger to apply the business judgment rule in the context of an interested merger transaction which, by its very nature, did not require a business purpose. See Rosenblatt v. Getty Oil Co., 493 A.2d at 937. Consequently, in Rosenblatt, in the context of a subsequent proceeding involving a parent-subsidiary merger, this Court held that the approval of a merger, as here, by an informed vote of a majority of the minority stockholders, while not a legal prerequisite, shifts the burden of proving the unfairness of the merger entirely to the plaintiffs. Id. Entire fairness remains the proper focus of judicial analysis in examining an interested merger, irrespective of whether the burden of proof remains upon or is shifted away from the controlling or dominating shareholder, because the unchanging nature of the underlying interested transaction requires careful scrutiny. See Weinberger v. UOP, Inc., 457 A.2d at 710 (citing Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107, 110 (1952)). The policy rationale for the exclusive application of the entire fairness standard to interested merger transactions has been stated as follows: Parent subsidiary mergers, unlike stock options, are proposed by a party that controls, and will continue to control, the corporation, whether or not the minority stockholders vote to approve or reject the transaction. The controlling stockholder relationship has the potential to influence, however subtly, the vote of [ratifying] minority stockholders in a manner that is not likely to occur in a transaction with a noncontrolling party. Even where no coercion is intended, shareholders voting on a parent subsidiary merger might perceive that their disapproval could risk retaliation of some kind by the controlling stockholder. For example, the controlling stockholder might decide to stop dividend payments or to effect a subsequent cash out merger at a less favorable price, for which the remedy would be time consuming and costly litigation. At the very least, the potential for that perception, and its possible impact upon a shareholder vote, could never be fully eliminated. Consequently, in a merger between the corporation and its controlling stockholder  even one negotiated by disinterested, independent directors  no court could be certain whether the transaction terms fully approximate what truly independent parties would have achieved in an arm's length negotiation. Given that uncertainty, a court might well conclude that even minority shareholders who have ratified a ... merger need procedural protections beyond those afforded by full disclosure of all material facts. One way to provide such protections would be to adhere to the more stringent entire fairness standard of judicial review. Citron v. E.I. Du Pont de Nemours & Co., 584 A.2d at 502. Once again, this Court holds that the exclusive standard of judicial review in examining the propriety of an interested cash-out merger transaction by a controlling or dominating shareholder is entire fairness. Weinberger v. UOP, Inc., 457 A.2d at 710-11. [5] The initial burden of establishing entire fairness rests upon the party who stands on both sides of the transaction. Id. However, an approval of the transaction by an independent committee of directors or an informed majority of minority shareholders shifts the burden of proof on the issue of fairness from the controlling or dominating shareholder to the challenging shareholder-plaintiff. See Rosenblatt v. Getty Oil Co., 493 A.2d at 937-38. Nevertheless, even when an interested cash-out merger transaction receives the informed approval of a majority of minority stockholders or an independent committee of disinterested directors, an entire fairness analysis is the only proper standard of judicial review. See id.