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New York’s Highest Court Adopts Delaware Business Judgment Standard for Controlling Stockholder Buyouts五月 6, 2016
On May 5, 2016, in In the matter of Kenneth Cole Productions, Inc., Shareholder Litigation (N.Y. 2016), the New York Court of Appeals adopted the standard of review established by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp. (Del. 2014) with respect to controlling stockholder going-private mergers, finding that New York courts, like those in Delaware, will apply the business judgment rule to take-private transactions where certain shareholder protective procedures are adhered to.
Analyzing the take-private offer and subsequent acquisition of Kenneth Cole Productions, Inc. by board member and namesake Kenneth D. Cole, New York’s highest court assessed whether the six shareholder protective conditions established by the Delaware court in M&F Worldwide permitted a more deferential business judgment review of the Cole transaction. In M&F Worldwide, the Delaware court articulated a clear path to avoid entire fairness review, finding that the business judgment rule will apply 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; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.”
The New York court reviewed the Kenneth Cole complaint to determine whether the six shareholder protective procedures set forth in M&F Worldwide were followed and concluded that the plaintiff’s allegations did not sufficiently allege the absence of any of the six conditions. As such, the court applied the business judgment review and deferred to the judgment of the special committee and board of directors in recommending the Kenneth Cole transaction. Like the Delaware court in M&F Worldwide, the New York court confirmed that evidence demonstrating that any of the procedural protections were not adhered to would have resulted in the court conducting an entire fairness review.
The New York court agreed with Delaware’s assessment that the protective procedures followed in M&F Worldwide have the effect of “disabling” the controlling stockholder from affecting the outcome of the transaction, making the transaction more akin to a “third-party, arm’s length merger.” Specifically, the New York court found that the standard properly balances the rights of minority stockholders “to obtain judicial review of transactions involving interested parties, and to proceed to trial where there is adequate proof that those interests may have affected the transaction” and the interests of directors and controlling stockholders to avoid frivolous litigation and judicial inquiry into independent business judgments.
In Kenneth Cole, the New York court distinguished its holdings from New York’s authoritative case on freeze-out mergers, which established that take-private transactions are subject to an entire fairness review, Alpert v. 27 Williams St. Corp. (N.Y. 1984), since unlike the offer in Kenneth Cole, the offer in Alpert was not conditioned on the approval of an independent special committee and the vote of a majority of the minority shareholders.
In light of the statutory business judgment rule contained in §717 of the New York Business Corporation Law, the ruling in Kenneth Cole is not surprising. Kenneth Cole is also generally consistent with past decisions interpreting New York law (including Minzer v. Keegan and Accord Dynamics Corp. of America v. WHX Corp.) which have held that, absent unusual or extreme facts, there generally is no enhanced scrutiny for boards of directors of New York corporations in M&A transactions.
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