10 March 2014
A recent decision of the Delaware Chancery Court, In re Orchard Enterprises, Inc. Stockholder Litigation, C.A. No. 7840-VCL (Del. Ch. Feb. 28, 2014), contains an extensive and helpful discussion of the law applicable to take-private transactions initiated by controlling stockholders.
Notably, the Court in Orchard followed recent Chancery Court decisions in holding that the business judgment standard of review potentially can apply to controlling stockholder take-private transactions, but only if several requirements are satisfied. If any of the requirements is not satisfied, the default standard applicable to controlling stockholder take-private transactions - the entire fairness standard - will apply instead. The Court's opinion provides guidance on the application of the entire fairness standard. The Court found that even relatively serious disclosure deficiencies do not necessarily cause a challenged transaction to be procedurally unfair, and that even a large difference between the transaction price and the judicially appraised price does not necessarily cause the transaction to be substantively unfair. The Court also discussed the flexibility that is available to it in crafting remedies when a breach of fiduciary duty is found following a challenge to this type of transaction. The remedies available include "quasi-appraisal damages" and also potentially greater "rescissory damages."
Delaware Court of Chancery provides guidance on standards of review and remedies applicable in controlling stockholder take-private transactions