2011 • Volume 36 • Number 3

Change of Control Special Committee: Breathing Life into CNX

Samuel C. Thompson, Jr.

Notwithstanding the excellence of the Delaware judiciary, the multiple standards of review under Delaware law for reviewing the actions of a target’s directors involved in a merger or acquisition transaction are cumbersome, a source of needless litigation, and economically inefficient. Consequently, the Delaware General Corporation Law (“DGCL”) should be amended to permit the shareholders of a corporation to adopt a provision requiring that if the corporation becomes a target of a bona fide acquisition proposal, the board of the corporation must petition the Delaware Court of Chancery for the appointment of an independent, disinterested, and knowledgeable special committee of the board (a “Change of Control SpecialCommittee’).

This Committee would have complete power over the acquisition transaction. At the discretion of the Delaware Court of Chancery, members of the current board or other persons could be appointed to the Change of Control Special Committee. As long as the target followed the decisions of the Change of Control Special Committee, including any decision to employ, maintain, or terminate a poison pill,the deferential business judgment rule standard of review would apply to the actions of the Committee. As a consequence, litigation involving the actions taken by the Committee would be rare, if not essentially eliminated, and it could be expected that the decisions made by the Committee would be in the interestof the target’s shareholders. As a practical matter, the role of the Court of Chancery in such transactions would be moved from the back-end to the front-end, in that the Chancery Court’s determination of the independence, disinterestedness, and competence of the board members would be made on an ex ante as opposed to an ex post basis.

This type of amendment to the DGCL is consistent with the concept of this statute as an “enabling” law, permitting shareholders to adopt provisions that the shareholders determine are in their interests.