Fernan Restrepo is Research Fellow at the Rock Center for Corporate Governance at Stanford Law School. This post is based on his recent paper, and is part of the Delaware law series; links to other posts in the series are available here.
Prior to 2013, merger freezeouts were invariably subject to entire fairness review, a demanding standard of judicial review that permits a judicial revision of the price paid to the target shareholders when the price is challenged. Even approval of the deal by a special committee of independent directors (“SC”) or by the majority-of-the-minority shareholders (“MOM”) would only serve to shift the burden of proof on entire fairness to the plaintiff.
This situation changed in 2013. In an attempt to incentivize the simultaneous use of independent director approval and MOM conditions, the Delaware Chancery Court held in In re MFW Shareholders Litigation, 67 A.3d 496 (Del. Ch. May 29, 2013) that when a merger freezeout is subject to those procedural protections, the transaction would be reviewed under the deferential business judgment rule and not under entire fairness. This paper examines the impact of MFW on transactional practice and deal outcomes.