Steven Epstein is partner and Gail Weinstein is senior counsel at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Epstein, Ms. Weinstein, Warren S. de Wied, Scott B. Luftglass, Philip Richter, and Robert C. Schwenkel. This post is part of the Delaware law series; links to other posts in the series are available here.
In Books-A-Million, Inc. Stockholders Litigation (Oct. 10, 2016), the Delaware Court of Chancery dismissed at the pleading stage of litigation the plaintiffs’ post-closing claims for damages relating to a squeeze-out going-private merger with the company’s controlling family.
The merger was structured to comply with the Delaware Supreme Court’s 2014 seminal MFW decision. MFW established an important new regime for judicial review of controller transactions, providing for review under the deferential business judgment rule, rather than the more stringent “entire fairness” standard, if, ab initio, the transaction was conditioned on approval by both (i) an independent, adequately empowered special committee that fulfilled its duty of care and (ii) a majority of the minority stockholders in a fully informed, uncoerced vote. Under business judgment review in this context, the only claim that will be entertained by the court will be waste (which may be reasonably inferred from bad faith).