Delaware Court of Chancery Revisits Standard for Going Private Transactions with Controlling Stockholders

On May 25, the Delaware Chancery Court issued a decision, In re CNX Gas Corporation Shareholders Litigation, that raises the bar for controlling stockholders seeking to acquire a controlled subsidiary. Examining a two-step transaction (a unilateral tender offer followed by a short-form merger), the court held that the claims against controlling stockholders in connection with such acquisitions will be entitled to review under the deferential business judgment rule (as opposed to the stricter “entire fairness” standard) only if the offer both (1) is affirmatively recommended by an independent special committee that has been delegated full authority of the board with respect to the offer and (2) contains a satisfactory “majority-of-the-minority” condition. Contrary to long-standing Delaware Supreme Court precedent, the court also stated that, if these standards were satisfied, a going private transaction structured by a controlling stockholder as a long-form merger should also be subject to review under the business judgment rule. The decision has important implications for controlling stockholders and their advisors in structuring and carrying out going private transactions.