The business judgment rule is now the standard of review in New York for going-private transactions involving controlling shareholders.
New York’s highest court, the New York Court of Appeals, made that determination on Thursday in the case of “In re: Kenneth Cole Productions Shareholder Litig.” The case was one of first impression for the N.Y. court, and is considered a landmark decision. The decision adopted the standard established by a Delaware Supreme Court in Kahn v. M&F Worldwide Corp., decided in 2014.
The ruling provides that transactions involving controlling shareholders get the benefit of the business judgment standard of review so long as two requirements are met: 1.) The transaction in question is approved by an independent special committee; and 2.) A fully informed majority of the minority shareholders. In so ruling the court rejected the idea that it was the fact-intensive “entire fairness” standard that applied. The business judgment standard is viewed as more defendant-friendly. But if certain shareholder-protection conditions are not met, that would trigger the entire fairness standard of review.
The decision is important because it sets precedent for future corporate transactions and corporate lawyers can use the case as a road map for structuring go-private deals involving controlling shareholders under N.Y. law.
In the N.Y. case, the Court of Appeals affirmed an appellate court’s decision to apply the business judgment standard of review and dismissed the matter based on the shareholder protections Kenneth Cole had built into the structure of the transaction. In so doing, the court deferred judgment to the Kenneth Cole board. Further, the court found that the shareholders who filed the appeal “did not sufficiently and specifically allege” that the shareholder protections were absent in the transaction.