The Court of Appeals, in a full-fledged opinion by Judge Stein, determined a shareholder class action complaint challenging a going-private merger was properly dismissed for failure to state a cause of action. The court adopted a Delaware standard of review for going-private mergers, i.e., where the controlling shareholder seeks to buy out all the outstanding shares and, in effect, take the publicly-traded company private. Plaintiff argued the “entire fairness” review standard should be applied. Defendants argued the “business judgment” review standard should be applied. The Court of Appeals chose a middle ground (the Delaware standard) which is essentially the business judgment standard with added protections for minority shareholders:
Plaintiff urges that we apply the entire fairness standard, which places the burden on the corporation's directors to demonstrate that they engaged in a fair process and obtained a fair price. Defendants seek application of the business judgment rule, with or without certain conditions. We are persuaded to adopt a middle ground. Specifically, the business judgment rule should be applied as long as the corporation's directors establish that certain shareholder-protective conditions are met; however, if those conditions are not met, the entire fairness standard should be applied.
[The adopted Delaware standard has been summarized as follows:] … “[I]n 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” … . Matter of Kenneth Cole Prods., Inc, 2016 NY Slip Op 03545, CtApp 5-5-16
CORPORATION LAW (STANDARD FOR REVIEW OF GOING-PRIVATE MERGERS ANNOUNCED; SHAREHOLDER CLASS ACTION CHALLENGING THE GOING-PRIVATE MERGER DISMISSED)/SHAREHOLDER ACTIONS (STANDARD FOR REVIEW OF GOING-PRIVATE MERGERS ANNOUNCED; SHAREHOLDER CLASS ACTION CHALLENGING THE GOING-PRIVATE MERGER DISMISSED)/GOING PRIVATE MERGER (CORPORATION LAW, STANDARD FOR REVIEW OF GOING-PRIVATE MERGERS ANNOUNCED; SHAREHOLDER CLASS ACTION CHALLENGING THE GOING-PRIVATE MERGER DISMISSED)