Private fund advisors and other asset managers with a controlling stake in a public company can delist that company with less exposure to litigation risk if they undergo certain precautionary measures, a Delaware Supreme Court ruling has confirmed.
The court affirmed that controlling stockholders, which gain the approval of both a special committee of independent directors and the majority of the minority stockholders in a going private transaction, can invoke a “business judgment” test of care should a plaintiff challenge the transaction. The business judgment test is Delaware's most forgiving standard of review for defendants, according to a Clifford Chance client alert.
Typically a controlling stakeholder will condition a take-private agreement with only one of the two approval methods: a special committee or minority shareholder vote. When only one approval method is offered any plaintiff challenge is subject to “the entire fairness standard”, a more rigorous standard of review for defendants under Delaware law.
Legal sources say firms intending to make use of the court decision should be aware of the downsides.
“Having a deal conditioned on both a minority stakeholder vote and independent special committee increases the chance of a deal being blocked, particularly because the minority stockholder vote is considered a bit more of a wild card” said Kaye Scholer M&A partner Diane Holt Frankle.
And independent directors who sit on special committees sometimes have unrealistic views of value or other motivations to resist a going-private proposal, the Clifford Chance alert said.