June 1, 2010

Delaware Addresses Standard Applicable to Controlling Stockholder Tender Offers and Mergers

Here is an excerpt from a Richards Layton memo: In In re CNX Gas Corp. Shareholders Litigation last Tuesday, the Delaware Chancery Court attempted to clarify the standard applicable to controlling stockholder tender offers and mergers. In a challenge to a controlling stockholder’s proposed freeze-out transaction (a first-step tender offer followed by a second-step short-form merger), the Court applied a standard derived from In re Cox Communications, Inc. Shareholders Litigation to hold that the presumption of the business judgment rule would apply to a controlling stockholder freeze-out only if the first-step tender offer is both (i) negotiated and recommended by a special committee of independent directors and (ii) conditioned on a majority-of-the-minority tender or vote (as the case may be) condition.

The Court held that, because CNX’s special committee did not make a recommendation in favor of the tender offer, the transaction would be reviewed under the entire fairness standard. While that fact, under the Court’s analysis, was sufficient to trigger the application of the entire fairness standard, the Court also noted that the special committee was not provided with the authority to bargain with the controller on an arm’s-length basis and that the majority-of-the-minority tender condition may have been ineffective. Nonetheless, the Court declined to issue an injunction since any harm to the stockholders could be remedied through post-closing money damages.

We have posted the opinion – and memos analyzing this case – in our “Controlling Shareholders” Practice Area.