Jason Halper and Nathan Bull are partners and Sara Bussiere is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on Cadwalader memorandum by Mr. Halper, Mr. Bull, Ms. Bussiere, Jared Stanisci, Victor Bieger, and Victor Celis. 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 HomeFed Corp. Stockholder Litigation (“HomeFed”), the Delaware Court of Chancery considered on a motion to dismiss whether a squeeze-out merger by a controlling stockholder complied with the procedural framework set forth in Kahn v. M&F Worldwide Corp. (“MFW”). In MFW, the Delaware Supreme Court held that the business judgment rule—rather than the entire fairness standard—applies to a controlling stockholder transaction if the transaction is conditioned “ab initio,” or at the beginning, upon approval of both an independent special committee of directors and the informed vote of a majority of the minority stockholders.
In HomeFed, however, the court denied a motion to dismiss by the defendants, the directors of HomeFed Corporation (“HomeFed”) and its controller Jeffries Financial Group, Inc. (“Jeffries”), crediting allegations that Jeffries did not commit to the dual MFW protections before commencing discussions with HomeFed’s largest minority stockholder. In addition, the court found that a one-year “pause” in negotiations between Jeffries and HomeFed’s special committee did not “reset” the ab initio requirement of MFW.