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Chancery Rejects Request to Enjoin Freeze-Out by Controlling Stockholder

By Francis G.X. Pileggi

In Re CNX Gas Corp. Shareholders Litigation, C. A. Consol. No. 5377-VCL (Del Ch. May 25, 2010), read 42-page opinion here. This will be a very short overview until a fuller synopsis can be provided at a later date.

Overview

The Delaware Court of Chancery denied a request for a preliminary injunction in this expedited matter in which the representatives of a putative class of minority stockholders challenged a controlling stockholder freeze-out structured as a first-step tender offer to be followed by a second-step short-form merger.

Applicable Standard of Review

The Court applied the unified standard for reviewing controlling stockholder freeze-outs described in the case of In Re Cox Communications, Inc., Shareholders Litigation, 879 A.2d 604 (Del. Ch. 2005), but explained first as follows at page 14 of the slip opinion:

" As knowledgeable readers understand all too well, Delaware law applies a different standard of review depending on how a controlling stockholder freeze-out is structured." (citing Kahn v. Lynch Communications Systems Inc., 638 A.2d 1110(Del. 1994)).

The entire fairness standard was applied to the facts of this case for several reasons: (i) the special committee did not recommend the transaction; (ii) the special committee was not provided with the authority to bargain with the controller on an arm's length basis; and (iii) there was a reasonable question about the effectiveness of the majority-of-the-minority tender condition. The "flip side" of that is the reason the BJR did not apply .

That is, the BJR did not apply because there was no affirmative recommendation by the special committee AND there was no approval by the majority of unaffiliated stockholders.

Reason Why Preliminary Injunction Denied

The Court reasoned that in light of the fairness standard applying, any harm to the putative class could be remedied by a post-closing damages action. Moreover: (i) there was no viable disclosure claim; and (ii) the tender offer was not coercive.

Full post as published by Delaware Corporate and Commercial Litigation Blog on May 26, 2010 (boomark / email).