Condition transactions on certain votes to protect against minority shareholder claims

Swomley v. Schlecht, et. al., C.A. No. 9355-VCL (November 19, 2015)

The Delaware Supreme Court confirmed that a minority-shareholder’s challenge to a “going private” transaction will be reviewed under the business judgment standard rather than the more demanding entire fairness standard of review if the following six factors are satisfied:the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders;

1. the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders;
2. the Special Committee is independent;
3. the Special Committee is empowered to freely select its own advisors and to say no definitively;
4. the Special Committee meets its duty of care in negotiating a fair price;
5. the vote of the minority is informed; and
6. there is no coercion of the minority.

Bottom Line: Utilization of these protections will likely result in dismissal on the pleadings of a minority shareholder’s claims against a controlling shareholder in both the public and private company context.  To avoid the discovery costs associated with defending against a minority shareholder’s claims, the transaction should always be conditioned upon the vote of a special committee and a majority of the minority stockholders.