Delaware Supreme Court Reverses Chancery On “Squeeze Out”

Duane Morris’s Delaware Business Law reports that the Delaware Supreme Court reversed the Court of Chancery in a case challenging a squeeze-out merger. The case was City of Dearborn Police and Fire Revised Retirement System (Chapter 23) v. Brookfield Asset Management Inc.

The Court of Chancery had dismissed based on the MFW cleansing. It ruled that an effective special committee and informed, disinterested stockholder vote had neutralized the conflict of interest in the controller-led buyout.

“MFW cleansing,” is a way for controllers to pursue a squeeze-out without losing the protection of the business judgment rule. The controller must establish an independent special committee with the fully informed approval of the minority stockholders to negotiate the transaction. 

In the case cited above, the Delaware Supreme Court said that deficient disclosures relating to conflicts of interest affecting advisors to the special committee impaired the stockholder vote. A “squeeze-out” creates a conflict that Delaware courts review under the “entire fairness” standard. That was the case with the City of Dearborn.

The plaintiff stockholders sued after the special committee recommended the board approve the transaction, which valued the company at $3.3 billion. They made several arguments. The trial court disagreed, held that both MFW protections were satisfied, and dismissed under the business judgment rule.

The Deleware Supreme Court agreed that the special committee had functioned properly and was not coerced, but disagreed that the stockholder vote had been fully informed for reasons discussed in the article, and remanded the case back to the trial court.

The Court of Chancery may still hold that the transaction was “entirely fair,” but Duane Morris points out that the process was expensive and time-consuming, which underlines the importance of scrupulous adherence to the MFW framework to obtain leading-stage dismissal.