What the Kahn Decision Says About “Special Committees”

The recent decision by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp. has generated extensive commentary. That decision held that the relatively deferential “business judgment” standard of review, rather than the more exacting “entire fairness” standard, may be applied in controlling-shareholder merger transactions if certain procedural protections are in place from the outset of the process.

Those protections are: the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care, and the uncoerced, informed vote of a majority of minority stockholders.

The shift in the nature of the judicial review may be less dramatic than suggested by the headlines that followed the decision. Under Kahn, a court will apply the business judgment standard in controlling-shareholder merger transactions only if the Special Committee has actually performed its obligation to negotiate a fair price effectively and with due care, and if the court has scrutinized the factual record in sufficient detail so as to conclude that the due care and other conditions have been satisfied.

The Kahn decision represents a challenge by the Delaware Supreme Court to have Special Committees perform their roles with such vigor that the reviewing court will conclude that a fair price has been negotiated.

The court makes clear that it stands ready to review the work of Special Committees on the basis of the traditional “entire fairness” standard if the conditions laid out in the decision are not met.