Delaware Supreme Court Upholds Court of Chancery's Bench Ruling in "SynQor" for Applying "M&F WorldWide" Test | Practical Law

Delaware Supreme Court Upholds Court of Chancery's Bench Ruling in "SynQor" for Applying "M&F WorldWide" Test | Practical Law

The Delaware Supreme Court upheld the Court of Chancery's bench ruling in Swomley v. Schlecht ("SynQor"), which had applied the Supreme Court's ruling in Kahn v. M & F Worldwide to a transaction involving a private company and held that the controlling stockholder satisfied the test for application of the business judgment rule.

Delaware Supreme Court Upholds Court of Chancery's Bench Ruling in "SynQor" for Applying "M&F WorldWide" Test

by Practical Law Corporate & Securities
Published on 24 Nov 2015 • Delaware
The Delaware Supreme Court upheld the Court of Chancery's bench ruling in Swomley v. Schlecht ("SynQor"), which had applied the Supreme Court's ruling in Kahn v. M & F Worldwide to a transaction involving a private company and held that the controlling stockholder satisfied the test for application of the business judgment rule.
In a one-page order, the Delaware Supreme Court affirmed the Court of Chancery's bench ruling in Swomley v. Schlecht ("SynQor"), (Del. Ch. Aug. 27, 2014) (TRANSCRIPT). The order does not provide reasons for its decisions, stating simply that the final judgment of the Chancery Court should be affirmed for the reasons stated in the bench ruling ( (Del. Nov. 19, 2015)).
The facts of the case and the Chancery Court's decision are fully described in Legal Update, Swomley v. Schlecht ("SynQor"): Conflict Transaction Satisfies Test for Business Judgment after Price Element Reviewed for Gross Negligence. The SynQor decision represented the Delaware judiciary's first opportunity to shift the standard of review for controlling-stockholder transactions from entire fairness to business judgment if the stockholder has met the test laid out in Kahn v. M & F WorldWide Corp., 88 A.3d 635 (Del. 2014). For a description of the test, see Practice Note, Going Private Transactions: Overview: Avoiding Entire Fairness Review by Employing Procedural Protections. Based on the Supreme Court's affirmation, the following takeaways from the Chancery Court's ruling can be assumed to be controlling law:
  • The factor of the test that requires that the special committee of independent directors meet its duty of care in negotiating a fair price is reviewed under a standard of gross negligence (a more forgiving standard than some observers thought might apply before the Chancery Court's ruling).
  • The M & F Worldwide test for shifting the standard of review applies equally to private companies. The Chancery Court had entertained the possibility that shifting the standard of review should only be available to public companies, since stockholders of public companies have additional protections in liquidity and a market price. However, the Chancery Court rejected this distinction, as discussed in the Legal Update.
  • Dismissal on the pleadings is an intended possibility of M & F Worldwide and will be granted when appropriate.
  • An initial, exploratory offer from the controlling stockholder does not have to perfectly match the M & F Worldwide template, as long as the controller effectively agrees to the up-front conditions before negotiations with the special committee begin. This can be accomplished if the stockholder, in his capacity as a director, signals his approval of the conditions by signing board resolutions that authorize commencement of negotiations on the basis of the M & F Worldwide factors.