Houlihan Capital Releases Article on Business Judgement Rule

Delaware Chancery Court Allows Business Judgment Rule Instead of Entire Fairness Standard in Minority Squeeze-Out Transaction

A recent Delaware Chancery Court opinion by Chancellor Leo Strine, issued May 29, 2013, provides new guidance regarding when the less onerous “Business Judgment Rule” would apply as opposed to the stricter “Entire Fairness Standard” to evaluate the fairness of an acquisition of a company by its controlling shareholder(s). Chancellor Strine’s ruling In re MFW Shareholders Litigation indicates that Delaware courts will rely upon the Business Judgment Rule instead of the Entire Fairness Standard, if such a minority squeeze-out / freeze-out transaction is approved by both (i) a special committee of independent directors and (ii) a majority of the acquiree’s minority shareholders.

The essence of the Business Judgment Rule is that directors, officers, managers, and other agents of a company are immune from liability to the company for loss incurred in company transactions that are within their authority and power to effect, so long as they are independent and disinterested with respect to the action at issue, and such transactions are completed in good faith as well as with reasonable skill and prudence. If a company director or other fiduciary is not independent and disinterested, transactions may be subject to the fact-intensive enhanced scrutiny of the Entire Fairness Standard, which tests both (i) fair price and (ii) fair dealing (Weinberger v. UOP, Inc., 1983).

Delaware courts have been debating for more than a decade whether the Entire Fairness Standard should apply if procedures were in place to mitigate a conflict of interest, such as an independent committee, minority approval, or a go-shop provision. However, the In re MFW Shareholders ruling appears to lay out a means for controlling shareholders to execute a buy-out without invoking the Entire Fairness Standard, and instead fall under the purview of the Business Judgment Rule.

Houlihan Capital can provide critical valuation information to interested parties in a transaction by rendering an independent fairness opinion, which can increase the probability that a fiduciary’s decision will be protected by the Business Judgment Rule instead of the Entire Fairness Standard. Houlihan Capital provides clients with independent valuations and has a history of working closely with clients’ legal counsel, regulators, auditors, and investors on matters of transaction fairness.

For more information regarding when and why to obtain a fairness opinion, please see Houlihan Capital’s white paper Fairness Opinions: Uses and Issues. For further information on independent third party valuation services, please contact Paul Clark (pclark@houlihancapital.com) at 312-450-8656, or visit www.houlihancapital.com.

Houlihan Capital is a leading, solutions-driven valuation, financial advisory, and boutique investment banking firm committed to delivering superior client value and thought leadership in an ever-changing landscape. The firm has extensive experience in providing objective, independent and defensible opinions of value that meet accounting and regulatory requirements. Our clients include some of the largest asset managers, private equity funds, hedge funds, fund administrators, and both public and private operating companies, who benefit from our comprehensive valuation and financial advisory services. Houlihan Capital is a Financial Industry Regulatory Authority (FINRA) and SIPC member, committed to the highest levels of professional ethics and standards.

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