Transactions
such as mergers between a company and its controlling shareholders are subject
to close scrutiny by courts. Such transactions give rise to conflict of
interest as they are carried out between related parties and therefore require
close supervision. Moreover, mergers with controlling shareholders may also be
utilised to force out minority shareholders of a company if the non-controlling
shareholders are paid the consideration in cash. These are generally referred
to as freezeout mergers in the US context. Historically, such mergers have been
subjected to a high standard of scrutiny where courts have applied the “entire
fairness” standard commencing from the landmark case of Weinberger
v. UOP.
such as mergers between a company and its controlling shareholders are subject
to close scrutiny by courts. Such transactions give rise to conflict of
interest as they are carried out between related parties and therefore require
close supervision. Moreover, mergers with controlling shareholders may also be
utilised to force out minority shareholders of a company if the non-controlling
shareholders are paid the consideration in cash. These are generally referred
to as freezeout mergers in the US context. Historically, such mergers have been
subjected to a high standard of scrutiny where courts have applied the “entire
fairness” standard commencing from the landmark case of Weinberger
v. UOP.
This position was
revisited earlier this week by the Delaware Chancery Court in Re
MFW Shareholders Litigation where the court applied the less onerous
business judgment rule to the merger of a company with its controlling
shareholder in which an offer was made to buy out the minority shareholders.
The court adopted a deferential approach because the transaction was structured
in a manner that took into account minority interests. Two protections
specifically found relevance. First, an independent special committee of
directors approved the transaction. Second, a majority of the shareholders
unaffiliated with the controlling shareholder approved it as well. In other
words, it was an independent shareholder approval or a “majority of the
minority” vote. This decision indicates the key protections that transaction
planners must offer minority shareholders if they are to be sustainable if
challenged in a court of law.
revisited earlier this week by the Delaware Chancery Court in Re
MFW Shareholders Litigation where the court applied the less onerous
business judgment rule to the merger of a company with its controlling
shareholder in which an offer was made to buy out the minority shareholders.
The court adopted a deferential approach because the transaction was structured
in a manner that took into account minority interests. Two protections
specifically found relevance. First, an independent special committee of
directors approved the transaction. Second, a majority of the shareholders
unaffiliated with the controlling shareholder approved it as well. In other
words, it was an independent shareholder approval or a “majority of the
minority” vote. This decision indicates the key protections that transaction
planners must offer minority shareholders if they are to be sustainable if
challenged in a court of law.
A commentary
of the decision and its background can be found on Reuters,
and it is not intended to discuss the merits of the decision in any detail.
of the decision and its background can be found on Reuters,
and it is not intended to discuss the merits of the decision in any detail.
In
juxtaposition, the law in India arguably confers lesser protection on minority
shareholders both in related party transactions generally as well as in squeeze
outs. As discussed extensively on this Blog, related party transactions are
subject to greater disclosures but not to approval by either an independent
committee of directors or independent shareholders, although the position is
likely to change drastically if and when the Companies Bill, 2012 is enacted
(e.g. section 188, although a merger is not expressly covered in that
provision).
juxtaposition, the law in India arguably confers lesser protection on minority
shareholders both in related party transactions generally as well as in squeeze
outs. As discussed extensively on this Blog, related party transactions are
subject to greater disclosures but not to approval by either an independent
committee of directors or independent shareholders, although the position is
likely to change drastically if and when the Companies Bill, 2012 is enacted
(e.g. section 188, although a merger is not expressly covered in that
provision).
As regards squeeze outs,
the legal position continues to be unsettled where companies have the option of
following either schemes of arrangement (where minority shareholders have some
protection due to classification of shareholders) or reduction of capital
(where no independent shareholder approval is required). Previous discussion on
squeeze outs is contained here
and here.