New York High Court Adopts Del. Merger Review Standard

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By Michael Greene

May 5 — New York's highest court May 5 declined to revive an investor lawsuit challenging the 2012 buyout of Kenneth Cole Productions Inc. by its founder and controlling stockholder Kenneth D. Cole.

In doing so, the court applied the “business judgment rule”—which is more deferential to corporate decision-making—citing the Delaware Supreme Court's decision in Kahn v. M&F Worldwide Corp., 88 A.3d 635, 2014 BL 71689.

Writing for the court, Judge Leslie E. Stein said the MFW standard properly considers the rights of minority shareholders and balances them against the interests of directors and controlling shareholders.

The ruling is one of first impression that provides an important roadmap for future corporate deals and for lawyers structuring going-private transactions involving controlling shareholders under New York law, said Willkie Farr & Gallagher LLP attorneys Tariq Mundiya, Sameer Advani and Benjamin McCallen, who represented Kenneth Cole Productions, in a May 5 client memorandum.

“The case also provides important guidance for practitioners structuring transactions outside New York and Delaware because the highest courts in two states now have the same standard for review of going private transactions,” they said.

Attorneys representing the shareholder plaintiff did not immediately respond to a request for comment.

`MFW' Ruling

In the 2014 MFW decision, the Delaware Supreme Court held that a going-private merger is entitled to “business judgment rule” deference instead of the enhanced “entire-fairness” review when it is conditioned on approval by a special committee of independent directors and an unaffiliated shareholder vote (12 CARE 320, 3/21/14).

In the Kenneth Cole case, the Erie County Employees Retirement System filed a purported class action alleging that the company's directors breached their fiduciary duties owed to minority shareholders.

Cole, who held approximately 89 percent of the company's voting power, made an initial offer to buy his namesake company for $15 per share. After months of negotiations, a special committee approved a $15.25-per-share offer. Subsequently, 99.8 percent of the minority shareholders voted in favor of the merger.

Before reaching the New York Court of Appeals, an appellate court had affirmed a trial court's dismissal of the case (12 CARE 1624, 12/5/14). The state high court, applying the Delaware Supreme Court's review standard, affirmed the appellate court's ruling.

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