In a self-interested transaction between a company and its controlling stockholder, the operative standard of judicial review under Delaware law is the most rigorous: entire fairness standard of review. To obtain the least rigorous, business judgment standard of review, and reduce the risk of a minority stockholder challenge in a merger transaction between a company and its controlling stockholder, parties may condition the controlling stockholder merger on approval by: (1) a board committee composed of disinterested and independent directors and (2) the affirmative vote of a majority of the minority or unaffiliated stockholders (In re MFW Shareholders Litigation, 67 A.3d 496 (Del. Ch. 2013), aff’d sub nom., Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014)). Similarly, parties may employ either one of these safeguards to shift the burden of proof to the plaintiff under the entire fairness standard of review (Emerald Partners v. Berlin, 787 A.2d 85, 98-99 (Del. 2001)). Moreover, a well-functioning special committee advised by its own independent financial and legal advisers, and/or an affirmative vote of a majority of the minority or unaffiliated stockholders makes a stronger case to support a finding of fair dealing or process, which in turn influences the fair price inquiry to satisfy entire fairness review.
Fraud by a corporate fiduciary in the merger transaction, however, vitiates these safeguards while undermining the fairness of the process and a fair price under entire fairness review. Indeed, as the Delaware Court of Chancery recently emphasized in In re Dole Food Stockholder Litigation, C.A. No. 8703-VCL (Del. Ch. August 27, 2015), “What [a special-committee process cannot] overcome, what [a] stockholder vote [cannot] cleanse, and what even an arguably fair price does not immunize, is fraud.” In Dole, the Court of Chancery held that Dole Food Co.’s controlling stockholder, who was also a director and the CEO, and his right-hand man, who served as an officer and director, were liable for more than $148 million for their breach of the fiduciary duty of loyalty in a going-private merger of Dole with the controlling stockholder. The court ruled the merger did not satisfy the entire fairness test because the fraudulent conduct of the controlling stockholder’s right-hand man deprived the special committee of the ability to negotiate with the controlling stockholder on a fully informed basis as the bargaining agent of the minority stockholders, and also deprived the minority stockholders of the ability to protect themselves by making a fully informed decision to vote against the merger.
