Kahn v. M&F Worldwide Corporation : A Small but Significant Step Forward in the War Against Frivolous Shareholder Lawsuits

From time-to-time a controlling shareholder will want to eliminate the minority shareholders by buying them out in a transaction called a freeze-out merger. When challenged, the Delaware courts have reviewed the transaction under an entire fairness standard of review. Unfortunately, the application of the entire fairness standard of review in freeze-out mergers has also created unintended negative consequences. Because entire fairness makes it almost impossible for defendants to get the case dismissed prior to trial, it has made it extremely tempting for plaintiffs' attorneys, in order to earn attorney's fees, to automatically file a class action lawsuit in a freeze-out merger without regard to the merits. The Delaware Supreme Court in Kahn v. M&F Worldwide Corp. attempts to rectify this situation by allowing the defendants to gain the protection of the business judgment rule if a dual protection merger structure is put into place, i.e., the use of a special independent committee in negotiating the transaction on behalf of the minority shareholders and the approval of the transaction by an informed majority of minority shareholders. Unfortunately, the result is mostly aspirational because while the standard of review does eventually shift to the much more lenient business judgment rule, it does little to relieve the burden on defendants to show that the freeze-out merger ultimately meets the objective of an entire fairness standard of review, “fair price.” Each of the six requirements that must be met by the board and the controlling shareholder is subject to discovery and the judicial review in total still requires a level of scrutiny in terms of both process and discovery that must be considered the functional equivalent of entire fairness. However, this does not mean that Kahn is without significance. As discussed in the commentary, Kahn may lay the foundation for a greater judicial attack on frivolous lawsuits in the context of freeze-out mergers if new approaches are allowed to enhance Kahn's dual protection merger structure