Kahnv.M & F Worldwide Corp.

Whether the business judgment standard of review applies to a going-private merger proposed by a controlling stockholder that is conditioned from the outset on both approval by a properly empowered independent special committee and an informed uncoerced majority-of-the-minority stockholder vote?²⁷

In controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.²⁸

Yes. MFW is a holding company incorporated in Delaware. Before the Merger that is the subject of this dispute, MFW was 43.4% owned by MacAndrews & Forbes, which in turn is entirely owned by Ronald O. Perelman.

MFW had four business segments. Three were owned through a holding company, Harland Clarke Holding Corporation. The fourth segment, which was not part of HCHC, was Mafco Worldwide Corporation, a manufacturer of licorice flavorings.

The MFW board had thirteen members. Perelman, Schwartz, and Bevins were officers of both MFW and MacAndrews & Forbes.

In May 2011, Perelman began to explore the possibility of taking MFW private. At that time, MFW's stock price traded in the $20 to $24 per share range.

On June 13, 2011, Schwartz sent a letter proposal to the MFW board to buy the remaining MFW shares for $24 in cash. The proposal stated that the transaction would be subject to approval by a special committee and a non-waivable condition requiring approval of a majority of the shares not owned by M & F or its affiliates. MacAndrews & Forbes filed this letter with the SEC and issued a press release.

The MFW board met the following day to consider the Proposal. Schwartz presented the offer. Subsequently, Schwartz and Bevins recused themselves from the meeting, as did Dawson.

The independent directors formed the Special Committee. The Special Committee consisted of Byorum, Dinh, Meister (the chair), and Webb after Slovin recused himself.

The board resolution empowered the Special Committee to investigate the Proposal, evaluate its terms, negotiate with Holdings, negotiate definitive agreements, report recommendations, and determine to elect not to pursue the Proposal. The Board shall not approve the Proposal without a prior favorable recommendation of the Special Committee. The Special Committee is empowered to retain legal counsel, a financial advisor, and such other agents.

The Special Committee retained Willkie Farr & Gallagher LLP as its legal advisor. After interviewing four potential financial advisors, the Special Committee engaged Evercore Partners.

The Special Committee held a total of eight meetings during the summer of 2011. The Special Committee received updated projections from HCHC. The updated projections forecast EBITDA for MFW of $491 million in 2015.

The Special Committee screened MacAndrews-affiliated executives from the process. The Special Committee considered strategic alternatives.

On August 18, 2011, the Special Committee rejected the $24 a share Proposal and countered at $30 per share.

On September 9, 2011, MacAndrews & Forbes rejected the $30 per share counteroffer. Later, Schwartz conveyed MacAndrews's best and final offer of $25 a share.

At its eighth and final meeting on September 10, 2011, the Special Committee unanimously approved and agreed to recommend the Merger at a price of $25 per share after Evercore opined that the price was fair.

On November 18, 2011, the stockholders were provided with a proxy statement. The proxy statement contained the history of the Special Committee's work and recommended that they vote in favor of the transaction at a price of $25 per share.

The Merger was approved by a vote of 65.4% of MFW's minority stockholders. The Merger closed in December 2011.

The Appellants initially sought to enjoin the transaction. They withdrew their request for injunctive relief after taking expedited discovery. The Appellants then sought post-closing relief against M & F, Ronald O. Perelman, and MFW's directors for breach of fiduciary duty. The Defendants moved for summary judgment, which the Court of Chancery granted.

The established facts demonstrate that M & F conditioned its proposal on both protections from the outset when Schwartz delivered the letter on June 13, 2011, stating the transaction would not proceed without special committee approval and a non-waivable majority-of-the-minority vote.²⁹ The Special Committee was independent because the Court of Chancery and this Court found no material ties for Byorum, Dinh, and Webb that would compromise their impartiality under the materiality standard.³⁰ The committee was empowered as the board resolution gave it authority to negotiate, retain advisors, and the board could not approve without its recommendation, and it had the practical ability to say no.³¹ The committee fulfilled its duty of care by holding eight meetings, obtaining updated projections, rejecting the initial offer, countering at thirty dollars, and ultimately accepting twenty-five dollars after Evercore's fairness opinion.³² The minority vote was informed as the proxy disclosed the negotiation history and valuation ranges, and more than sixty-five percent approved.³³ There was no coercion as the facts show no evidence of retribution or improper influence.³⁴ Therefore all six conditions were satisfied on the undisputed record.³⁵

The business judgment standard of review applies to the merger.³⁶

Whether the special committee formed to evaluate the MFW merger proposal was independent, adequately empowered to negotiate and reject the transaction, and fulfilled its duty of care?³⁷

To obtain the benefit of burden shifting, the controlling stockholder must do more than establish a perfunctory special committee of outside directors.³⁸ Rather, the special committee must function in a manner which indicates that the controlling stockholder did not dictate the terms of the transaction and that the committee exercised real bargaining power at arm's length.³⁹ The committee must meet its duty of care.⁴⁰

Yes. The Appellants do not challenge the independence of the Special Committee's Chairman, Meister.⁴¹ The Court of Chancery concluded that the fact of Webb having engaged in business dealings with Perelman nine years earlier did not raise a triable fact issue regarding his ability to evaluate the Merger impartially.⁴²

The Court of Chancery found that the Appellants failed to proffer any evidence to show that compensation received by Dinh's law firm was material to Dinh, in the sense that it would have influenced his decisionmaking with respect to the M & F proposal.⁴³ The only evidence of record, the Court of Chancery concluded, was that these fees were de minimis and that the Appellants had offered no contrary evidence that would create a genuine issue of material fact.⁴⁴

The Court of Chancery concluded that the Appellants presented no evidence of the nature of Byorum's interactions with Perelman while she was at Citibank.⁴⁵ Nor was there evidence that after 1996 Byorum had an ongoing economic relationship with Perelman that was material to her in any way.⁴⁶

It is undisputed that the Special Committee was empowered to hire its own legal and financial advisors.⁴⁷ The Special Committee retained Willkie Farr & Gallagher LLP as its legal advisor. After interviewing four potential financial advisors, the Special Committee engaged Evercore Partners.

The Court of Chancery found that it was undisputed that the Special Committee was empowered not simply to evaluate the offer but to negotiate with M & F over the terms of its offer to buy out the noncontrolling stockholders.⁴⁸ This negotiating power was accompanied by the clear authority to say no definitively to M & F.⁴⁹

The Special Committee insisted from the outset that MacAndrews be screened off from the Special Committee's process.⁵⁰ The Special Committee held a total of eight meetings during the summer of 2011. The Special Committee received updated projections reflecting lower EBITDA.⁵¹ The Special Committee constructed a valuation model.⁵² The Special Committee rejected the twenty-four-dollar offer and countered at thirty dollars.⁵³ The Special Committee unanimously approved the twenty-five-dollar price after Evercore opined that the price was fair based on generally accepted valuation methodologies.⁵⁴

The special committee was independent, adequately empowered to negotiate and reject the transaction, and fulfilled its duty of care.⁵⁵

Whether the majority-of-the-minority stockholder vote approving the MFW merger was fully informed and free from coercion?⁵⁶

An uncoerced, informed majority-of-the-minority vote, without any other procedural protection, is itself sufficient to shift the burden of persuasion to the plaintiff under the entire fairness standard of review.⁵⁷

Yes. On November 18, 2011, the stockholders were provided with a proxy statement. The proxy statement contained the history of the Special Committee's work and recommended that they vote in favor of the transaction at a price of twenty-five dollars per share.

The proxy statement disclosed that the Special Committee had countered M & F's initial twenty-four-dollar per share offer at thirty dollars per share but only was able to achieve a final offer of twenty-five dollars per share.⁵⁸ The proxy statement disclosed that the MFW business divisions had discussed with Evercore whether the initial projections reflected management's latest thinking.⁵⁹ It also disclosed that the updated projections were lower.⁶⁰ The proxy statement also included the five separate price ranges for the value of MFW's stock that Evercore had generated with its different valuation analyses.⁶¹

Knowing the proxy statement's disclosures of the background of the Special Committee's work, of Evercore's valuation ranges, and of the analyses supporting Evercore's fairness opinion, MFW's stockholders representing more than 65.4 percent of the minority shares approved the Merger.⁶² The Court of Chancery found that the plaintiffs themselves do not dispute that the majority-of-the-minority vote was fully informed and uncoerced, because they fail to allege any failure of disclosure or any act of coercion.⁶³

The majority-of-the-minority stockholder vote approving the MFW merger was fully informed and free from coercion.⁶⁴