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.
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.
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.
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).