Standards of Review in Conflict Transactions on Motions to Dismiss: Lessons Learned in the Past Decade
Lewis H. Lazarus & Brett M. McCartney
This Article review show the Delaware courts have assessed whether plaintiffs have pleaded facts which overcome the business judgment standard of review in favor of enhanced scrutiny or entire fairness in challengesto conflict transactions. The standard of review remains almost outcome-determinative at the motion to dismiss stage of the proceedings. Following a discussion in Part I of three issues the Delaware Supreme Court has clarified since the publication in 2001 of Standards of Review in Conflict Transactions: An Examination of Decisions Rendered on Motions to Dismiss, 26 Del. J Corp. Law 911, Part II discusses the standard of review for a motion to dismiss under Delaware law. PartIII defines a “conflict transaction”and PartIV describes the three standards of review for challenges to conflict transactions: business judgment, enhanced scrutiny and entire fairness.
Part V analyzes the court’s application of these standards of review to complaints in the past ten years challenging conflict transactions. The authors organize the analysis by complaints in which plaintiffs succeeded in rebutting the business judgment rule, complaints where they failed to do so, complaints involving the interplay of Revlon claims, and complaints involving controlling stockholders. The authors conclude that at least for transactions not involving a controlling stockholder on both sides, a plaintiffs’ complaint remains unlikely to survive a motion to dismiss if a conflict transaction has been approved by a majority of fully informed, disinterested and independent directors as such a complaint will be dismissed under the business judgment standard of review. While the entire fairness standard will apply ab initio to transactions where the controlling stockholder is on both sides, whether the DelawareSupreme Court will change the standard for controlling stockholder, going-private transactions involving unilateral two-step freeze-outs as has been suggested by the Court of Chancery remains uncertain.