Kahn v. M&F Worldwide Corp.

• Decision Date: 14 March 2014
• Docket Number: 2013.,No. 334,334
• Citation: 88 A.3d 635
• Court: United States State Supreme Court of Delaware
• Parties: Alan KAHN, Samuel Pill, Irwin Pill, Rachel Pill and Charlotte Martin, Plaintiffs Below, Appellants, v. M & F WORLDWIDE CORP., Ronald O. Perelman, Barry F. Schwartz, William C. Bevins, Bruce Slovin, Charles T. Dawson, Stephen G. Taub, John M. Keane, Theo W. Folz, Philip E. Beekman, Martha L. Byorum, Viet D. Dinh, Paul M. Meister, Carl B. Webb and MacAndrews & Forbes Holdings, Inc., Defendants Below, Appellees.

88 A.3d 635

Alan KAHN, Samuel Pill, Irwin Pill, Rachel Pill and Charlotte Martin, Plaintiffs Below, Appellants,

v.M & F WORLDWIDE CORP., Ronald O. Perelman, Barry F. Schwartz, William C. Bevins, Bruce Slovin, Charles T. Dawson, Stephen G. Taub, John M. Keane, Theo W. Folz, Philip E. Beekman, Martha L. Byorum, Viet D. Dinh, Paul M. Meister, Carl B. Webb and MacAndrews & Forbes Holdings, Inc., Defendants Below, Appellees.

No. 334, 2013.

Supreme Court of Delaware.

Submitted: Dec. 18, 2013.

Decided: March 14, 2014.

Court Below—Court of Chancery of the State of Delaware, C.A. No. 6566.

Upon appeal from the Court of Chancery. AFFIRMED.

Carmella P. Keener, Esquire, Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware, Peter B. Andrews, Esquire, Nadeem Faruqi, Esquire, Beth A. Keller, Esquire, Faruqi & Faruqi, LLP, Wilmington, Delaware, Carl L. Stine, Esquire (argued) and Matthew Insley–Pruitt, Esquire, Wolf Popper LLP, New York, New York, and James S. Notis, Esquire and Kira German, Esquire, Gardy & Notis, LLP, New York, New York, for appellants.

William M. Lafferty, Esquire, and D. McKinley Measley, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, and Tariq Mundiya, Esquire (argued), Todd G. Cosenza, Esquire and Christopher J. Miritello, Esquire, Willkie Farr & Gallagher LLP, New York, New York, for appellees, Paul M. Meister, Martha L. Byorum, Viet D. Dinh and Carl B. Webb.

Thomas J. Allingham, II, Esquire (argued), Christopher M. Foulds, Esquire, Joseph O. Larkin, Esquire, and Jessica L. Raatz, Esquire, Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington, Delaware, for appellees MacAndrews & Forbes Holdings, Inc., Ronald O. Perelman, Barry F. Schwartz, and William C. Bevins.

Stephen P. Lamb, Esquire and Meghan M. Dougherty, Esquire, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Wilmington, Delaware, for appellees M & F Worldwide Corp., Bruce Slovin, Charles T. Dawson, Stephen G. Taub, John M. Keane, Theo W. Folz, and Philip E. Beekman.

Before HOLLAND, BERGER, JACOBS and RIDGELY, Justices and JURDEN, Judge,¹ constituting the Court en Banc.

HOLLAND, Justice:

This is an appeal from a final judgment entered by the Court of Chancery in a proceeding that arises from a 2011 acquisition by MacAndrews & Forbes Holdings, Inc. (“M & F” or “MacAndrews & Forbes”)—a 43% stockholder in M & F Worldwide Corp. (“MFW”)—of the remaining common stock of MFW (the “Merger”). From the outset, M & F's proposal to take MFW private was made contingent upon two stockholder-protective procedural conditions. First, M & F required the Merger to be negotiated and approved by a special committee of independent MFW directors (the “Special Committee”). Second, M & F required that the Merger be approved by a majority of stockholders unaffiliated with M & F. The Merger closed in December 2011, after it was approved by a vote of 65.4% of MFW's minority stockholders.

The Appellants initially sought to enjoin the transaction. They withdrew their request for injunctive relief after taking expedited discovery, including several depositions. The Appellants then sought post-closing relief against M & F, Ronald O. Perelman, and MFW's directors (including the members of the Special Committee) for breach of fiduciary duty. Again, the Appellants were provided with extensive discovery. The Defendants then moved for summary judgment, which the Court of Chancery granted.

Court of Chancery Decision

The Court of Chancery found that the case presented a “novel question of law,” specifically, “what standard of review should apply to a going private merger conditioned upfront by the controlling stockholder on approval by both a properly empowered, independent committee and an informed, uncoerced majority-of-the-minority vote.” The Court of Chancery held that business judgment review, rather than entire fairness, should be applied to a very limited category of controller mergers. That category consisted of mergers where the controller voluntarily relinquishes its control—such that the negotiation and approval process replicate those that characterize a third-party merger.

The Court of Chancery held that, rather than entire fairness, the business judgment standard of review should apply “if, but only if: (i) the controller conditions the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee acts with care; (v) the minority vote is informed; and (vi) there is no coercion of the minority.” ²

The Court of Chancery found that those prerequisites were satisfied and that the Appellants had failed to raise any genuine issue of material fact indicating the contrary. The court then reviewed the Merger under the business judgment standard and granted summary judgment for the Defendants.

Appellants' Arguments

The Appellants raise two main arguments on this appeal. First, they contend that the Court of Chancery erred in concluding that no material disputed facts existed regarding the conditions precedent to business judgment review. The Appellants submit that the record contains evidence showing that the Special Committee was not disinterested and independent, was not fully empowered, and was not effective. The Appellants also contend, as a legal matter, that the majority-of-the-minority provision did not afford MFW stockholders protection sufficient to displace entire fairness review.

Second, the Appellants submit that the Court of Chancery erred, as a matter of law, in holding that the business judgment standard applies to controller freeze-out mergers where the controller's proposal is conditioned on both Special Committee approval and a favorable majority-of-the-minority vote. Even if both procedural protections are adopted, the Appellants argue, entire fairness should be retained as the applicable standard of review.

Defendants' Arguments

The Defendants argue that the judicial standard of review should be the business judgment rule, because the Merger was conditioned ab initio on two procedural protections that together operated to replicate an arm's-length merger: the employment of an active, unconflicted negotiating agent free to turn down the transaction; and a requirement that any transaction negotiated by that agent be approved by a majority of the disinterested stockholders. The Defendants argue that using and establishing pretrial that both protective conditions were extant renders a going private transaction analogous to that of a third-party arm's-length merger under Section 251 of the Delaware General Corporation Law. That is, the Defendants submit that a Special Committee approval in a going private transaction is a proxy for board approval in a third-party transaction, and that the approval of the unaffiliated, noncontrolling stockholders replicates the approval of all the (potentially) adversely affected stockholders.

FACTS

MFW and M & F

MFW is a holding company incorporated in Delaware. Before the Merger that is the subject of this dispute, MFW was 43.4% owned by MacAndrews & Forbes, which in turn is entirely owned by Ronald O. Perelman. MFW had four business segments. Three were owned through a holding company, Harland Clarke Holding Corporation (“HCHC”). They were the Harland Clarke Corporation (“Harland”), which printed bank checks; Harland Clarke Financial Solutions, which provided technology products and services to financial services companies; and Scantron Corporation, which manufactured scanning equipment used for educational and other purposes. The fourth segment, which was not part of HCHC, was Mafco Worldwide Corporation, a manufacturer of licorice flavorings.

The MFW board had thirteen members. They were: Ronald Perelman, Barry Schwartz, William Bevins, Bruce Slovin, Charles Dawson, Stephen Taub, John Keane, Theo Folz, Philip Beekman, Martha Byorum, Viet Dinh, Paul Meister, and Carl Webb. Perelman, Schwartz, and Bevins were officers of both MFW and MacAndrews & Forbes. Perelman was the Chairman of MFW and the Chairman and CEO of MacAndrews & Forbes; Schwartz was the President and CEO of MFW and the Vice Chairman and Chief Administrative Officer of MacAndrews & Forbes; and Bevins was a Vice President at MacAndrews & Forbes.

The Taking MFW Private Proposal

In May 2011, Perelman began to explore the possibility of taking MFW private. At that time, MFW's stock price traded in the $20 to $24 per share range. MacAndrews & Forbes engaged a bank, Moelis & Company, to advise it. After preparing valuations based on projections that had been supplied to lenders by MFW in April and May 2011, Moelis valued MFW at between $10 and $32 a share.

On June 10, 2011, MFW's shares closed on the New York Stock Exchange at $16.96. The next business day, June 13, 2011, Schwartz sent a letter proposal (“Proposal”) to the MFW board to buy the remaining MFW shares for $24 in cash. The Proposal stated, in relevant part:

The proposed transaction would be subject to the approval of the Board of Directors of the Company [ i.e., MFW] and the negotiation and execution of mutually acceptable definitive transaction documents. It is our expectation that the Board of Directors will appoint a special committee of independent directors to consider our proposal and make a recommendation to the Board of Directors. We will not move forward with the transaction unless it is approved by such a special committee. In addition, the transaction will be subject to a non-waivable condition requiring the approval of a majority of the shares of the Company not owned by M & F or its affiliates ....³

... In considering this proposal, you should know that in our capacity as a stockholder of the Company we are interestedonly in acquiring the shares of the Company not already owned by us and that in such capacity we have no interest in selling any of the...