On May 5, 2016, the New York Court of Appeals affirmed the lower courts' dismissals of a shareholder class action that challenged a going-private merger (In re Kenneth Cole Prod., Inc., S'holder Litig., (N.Y. Court of Appeals, May 5, 2016)). In so doing, the Court of Appeals explicitly adopted the reasoning and standard of review set out in Kahn v. M & F Worldwide Corp. to affirm the lower courts' rulings (88 A.3d 635 (Del. 2014)). For more on the Supreme Court's decision and the facts of the case, see Legal Update, In re Kenneth Cole: New York Court Dismisses Challenge to Going-private Transaction. For more on the Delaware Supreme Court's holding in M & F, see Legal Update, Kahn v. M&F Worldwide: Delaware Supreme Court Upholds Chancery Decision in MFW, but Opens Door to Challenges Against Controller Mergers.

In reaching its conclusion, the court distinguished the facts of Kenneth Cole from its seminal decision on freeze-out mergers, Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557 (1984). In Alpert, the court had held that a two-step freeze-out in which the counterparty is the company's controlling shareholder raises an inherent conflict of interest that shifts the burden of proof to the controller to prove good faith and the entire fairness of the merger. However, because Alpert involved a two-step freeze-out, the minority shareholders of the company did not vote on the merger before being cashed out. In a going-private transaction, by contrast, the shareholders vote on the merger. The target board in Alpert also did not appoint a special committee of independent directors to negotiate the transaction, while the board in Kenneth Cole did. On the basis of these distinctions, the court held that Alpert was not dispositive on the issue of the standard of review for a going-private merger.

At issue before the court, therefore, was whether it should:

The court elected to adopt the approach set out in M & F Worldwide, which maintains New York's preference for deferring to the business judgment of directors when appropriate, while conditioning the rule's availability in order to protect the rights of minority shareholders.

After applying the M & F Worldwide conditions, the court affirmed the lower courts' dismissal of the class action, concluding that:

While New York courts had referenced the holding in M & F Worldwide in earlier decisions, the highest court in New York has now explicitly adopted the reasoning set out in that case. The opinion thus provides controlling stockholders of New York corporations with a path to avoid entire fairness review and benefit from the presumptions of the business judgment rule. As in Delaware litigation, plaintiffs in going-private mergers will attempt to undermine the M & F Worldwide conditions by challenging the independence and power of the special committee members and the adequacy of the disclosures made to the shareholders. The target board must therefore appoint special committee members who are independent and disinterested and empower the special committee with a mandate to negotiate the transaction and to decline to enter one if the committee does not consider it fair to the shareholders. For further discussion, see Practice Note, Making Good Use of Special Committees.