Gail Weinstein is senior counsel and Steven Epstein is a partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Epstein, Philip Richter, and Scott Luftglass. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).
In In re Martha Stewart Living Omnimedia Inc. Stockholder Litigation (Aug. 18, 2017), the Delaware Court of Chancery dismissed claims made by former stockholders of Martha Stewart Living Omnimedia (“MSLO” or the “Company”) against the Company’s former controlling stockholder, Martha Stewart, for alleged breaches of her fiduciary duties in connection with the 2015 sale of the Company to third party buyer Sequential Brands, Inc. The lawsuit alleged that, although Stewart received the same merger consideration as the other stockholders for her shares, she had leveraged her position as the controlling stockholder of the Company to secure greater consideration for herself through “side deals” with the buyer.
Although the stringent entire fairness test is the default standard of review for challenges to conflicted controller transactions, the court held that the side deals did not render Stewart a “conflicted” controller and, therefore, that the business judgment rule applied. Further, the court stated, even if the side deals had rendered Stewart “conflicted,” the procedural protections that were provided to the minority stockholders would have lowered the standard of review to business judgment in any event under MFW.
