Standards of Review Applicable to Board Decisions in Delaware M&A Transactions

Robert B. Little is a partner and Steve J. Wright and Kiel Sauerman are associates at Gibson, Dunn & Crutcher LLP. This post is based on their Gibson Dunn memorandum and is part of the Delaware law series; links to other posts in the series are available here.

M&A practitioners are well aware of the several standards of review applied by Delaware courts in evaluating whether directors have complied with their fiduciary duties in the context of M&A transactions. Because the standard applied will often have a significant effect on the outcome of such evaluation, establishing processes to secure a more favorable standard of review is a significant part of Delaware M&A practice. The chart below identifies fact patterns common to Delaware M&A and provides a preliminary assessment of the likely standard of review applicable to transactions fitting such fact patterns. However, because the Delaware courts evaluate each transaction in light of the transaction’s particular set of facts and circumstances, and due to the evolving nature of the law in this area, this chart should not be treated as a definitive statement of the standard of review applicable to any particular transaction.

No. Facts Likely Standard of Review
1. Fully independent and disinterested board of directors; no controlling stockholder Business judgment
2. Majority of board is independent and disinterested; no controlling stockholder Business judgment
3. Board is evenly split between directors who are independent and disinterested and directors who are not independent and disinterested; no controlling stockholder Entire fairness Business judgment if transaction is approved by a properly functioning special committee or a fully-informed, uncoerced stockholder vote
4. Majority of board is not independent and disinterested; no controlling stockholder Entire fairness Business judgment if transaction is approved by a properly functioning special committee or a fully-informed, uncoerced stockholder vote
5. None of the board members is independent and disinterested; no controlling stockholder Entire fairness Business judgment if transaction is approved by a fully-informed, uncoerced stockholder vote
6. Transaction with a controlling stockholder where majority of the board is independent and disinterested Entire fairness, but either (a) a properly functioning special committee or (b) approval of a majority of the minority will shift the burden of proof to the plaintiff Business judgment if both (a) a properly functioning special committee and (b) approval of a majority of the minority
7. Transaction with a controlling stockholder where a majority of the board is not independent and disinterested Entire fairness, but either (a) a properly functioning special committee or (b) approval of a majority of the minority will shift the burden of proof to the plaintiff Business judgment if both (a) a properly functioning special committee and (b) approval of a majority of the minority
8. Controlling stockholder; majority of the board is independent and disinterested with respect to the controlling stockholder; controlling stockholder is not the counterparty in the transaction; and controlling stockholder is treated the same as other stockholders Business judgment
9. Controlling stockholder; majority of the board is not independent and disinterested with respect to the controlling stockholder; controlling stockholder is not the counterparty in the transaction; and controlling stockholder is treated the same as other stockholders Business judgment
10. Controlling stockholder; majority of the board is independent and disinterested with respect to the controlling stockholder; controlling stockholder is not the counterparty in the transaction; and controlling stockholder receives different treatment in the transaction than other stockholders Entire fairness, but either (a) a properly functioning special committee or (b) approval of a majority of the minority will shift the burden of proof to the plaintiff Business judgment if both (a) a properly functioning special committee and (b) approval a of majority of the minority
11. Controlling stockholder; majority of the board is not independent and disinterested with respect to the controlling stockholder; controlling stockholder is not the counterparty in the transaction; and controlling stockholder receives different treatment in the transaction than other stockholders Entire fairness, but either (a) a properly functioning special committee or (b) approval of a majority of the minority will shift the burden of proof to the plaintiff Business judgment if both (a) a properly functioning special committee and (b) approval of a majority of the minority

The complete publication, including footnotes, is available here.

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