The New York Appellate Division for the First Department recently held that the business judgment rule should be applied to a minority shareholder lawsuit challenging the terms of a going private transaction. The case is In re Kenneth Cole Productions, Inc. Shareholder Litigation, Index No. 650571/12 (N.Y. App. Div. 1st Dep’t Nov. 20, 2014).
The Facts of the Case
The suit involved a shareholder challenge to Kenneth Cole’s offer to take private Kenneth Cole Productions, Inc. (“KCP”) by purchasing all outstanding publicly traded common stock for $15.00 per share. Mr. Cole, the majority shareholder, already owned approximately 46 percent of the company’s common stock and 89 percent of the voting power.
After Mr. Cole proposed the transaction, the KCP board formed a special committee to negotiate the deal. The transaction required the approval of the committee as well as the company’s minority shareholders. After several months of negotiation, both approved the going private transaction at $15.25 per share. Several shareholders, however, challenged the deal, alleging breaches of fiduciary duty by Mr. Cole and several directors.
The trial court dismissed all of the claims, concluding that “even assuming that a higher price might have been possible, that does not render the special committee’s actions a violation of their fiduciary duties. At most, plaintiffs have alleged that they disagree with the manner in which the special committee pursued negotiations with Cole and are dissatisfied with the result. However, such dissatisfaction does not suggest that the process was unfair or demonstrate that a duty of trust was violated….”
On appeal, the plaintiffs maintained that the trial court was required to apply the “entire fairness” standard to the claims rather than the more lenient business judgment rule.
The Court’s Decision
The appeals court affirmed the dismissal. In so ruling, the Appellate Division rejected the plaintiffs’ argument that the trial court should have applied the more fact-intensive “entire fairness” standard, as set forth in Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557 (1984).As explained by the court, Alpert did not applybecause theKCP merger required the approval of the majority of the minority (i.e., non-Cole) shareholders.
The Appellate Division further found that the plaintiffs’ allegations that the special committee was “controlled” by Mr. Cole failed because “it is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of a corporate election.”
“In this particular case, pre-discovery dismissal based on the business judgment rule was appropriate since there are no allegations sufficient to demonstrate that the members of the board or the special committee did not act in good faith or were otherwise interested,” the panel stated.
The decision brings New York law in line with recent decisions by the Delaware Supreme Court. In Kahn v. M&F Worldwide, 88 A.3d 607 (Del. 2014), Delaware’s highest court held that the business judgment rule should apply to mergers between a controlling stockholder and its corporate subsidiary, “where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.”
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