DealLawyers.com Blog

September 16, 2014

Private Company Freeze-Out Merger Litigation Dismissed at Pleading Stage

Here’s news from Steven Haas of Hunton & Williams:

In a recent bench ruling in Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch. Aug. 27, 2014), the Court of Chancery reached two key holdings applicable to freeze-out mergers. First, Vice Chancellor Laster held that the Delaware Supreme Court’s decision in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), which allows for business judgment review of freeze-out mergers under certain conditions, applies to privately-held companies. “Historically,” he said, “we haven’t made any distinctions between public companies and private companies.” He continued that “the non-public company overlap might be taken into account as a factor, but I don’t think that it prevents the application of the Kahn-MFW test.”

Second, in applying Kahn v. M&F Worldwide, Vice Chancellor Laster granted the defendants’ motion to dismiss. He concluded that the plaintiff had failed to adequately plead that any of the six elements set forth in Kahn v. M&F Worldwide had not been met. Among other things, the freeze-out merger was negotiated by two independent directors serving on a special committee; the special committee had its own legal and financial advisors; and the merger was subjected to a non-waivable majority-of-the-minority stockholder approval condition. He also said the minority stockholders received a “public-company-style proxy statement” (which included a “fair summary” of the financial advisor’s analysis).

The ruling is notable for practitioners considering how to structure private company M&A transactions. Its greater significance, however, is the court’s dismissal of a challenge to a freeze-out merger on a motion to dismiss. Although Kahn v. M&F Worldwide charted a course for business judgment review of freeze-outs, the decision (namely, the somewhat infamous footnote 14) suggested that it will be hard to dispense with these cases before summary judgment. For that reason, many practitioners have questioned the value of that decision. But if more Delaware courts follow Swomley v. Schlecht and dismiss these challenges at the pleading stage, then more freeze-outs are likely to be structured to comply with Kahn v. M&F Worldwide.