Kahn v. M & F Worldwide Corp.

In this case, a controlling shareholder wanted to buy the rest of the company. We've seen in the prior cases that when a shareholder is squeezing out the minority shareholders, we typically use entire fairness because the shareholder is seizing the corporate machinery because of its power over the board and the other shareholders.

But what if it didn't use that power? Suppose that before starting any negotiations, the shareholder voluntarily relinquished any power it had over the corporation.

In this case the acquiror it said it would negotiate only against an independent committee of the board (none of the directors it controlled would vote on the deal) and wouldn't complete the deal unless it was approved by the minority shareholders. Further, it promised that if the independent directors or the shareholders rejected the deal, the shareholder wouldn't go hostile; it just wouldn't do the deal.

Where a controlling shareholder yields up their power voluntarily and in advance, we apply the business judgment rule. Yielding up the power requires that  the controller preconditions transaction on the approval of both an independent committee and a majority of the minority stockholders. The committee must be empowered to freely select its own advisors and to say no definitively. It must also satisfy its duty of care. The vote by the minority shareholders must be informed and uncoerced.

If all these processes are in place, the business judgment rule applies.

But what if we only do some of these? If the majority shareholder does one of these two protections (independent board or approval by the minority shareholders), the transaction is reviewed for entire fairness, but the burden of proof shifts to the plaintiffs (recall that defendents typically bear the burden of proof under entire fairness review). This provides a mild incentive for the controller to allow these independent actions.