Private equity firms 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 court has ruled.
Firms that gain the approval of both an independent special committee 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.
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). Conditioning an offer up front with both protections would however allow a court to uphold the deal “unless no rational person in good faith would conclude that the merger was favorable to the minority” under the business judgment review standard, according to Kaye Scholer M&A partner Diane Holt Frankle.
If only one approval method was offered, a court would instead consider a more plaintiff-friendly “entire fairness standard”, which Frankle said would necessitate “a lengthy and costly trial on fair price and fair process”.
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” says Frankle.