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. In my paper Change of Control Special Committee: Breathing Life into CNX, recently made public on SSRN, I put forward a proposal to resolve these issues through changes in Delaware’s General Corporation Law (“DGCL”). 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 Special Committee”). This Committee would have complete power over the acquisition transaction. At the discretion of the Delaware Court of Chancery, a member of the current board could be appointed to the Change of Control Special Committee.
All decisions of the Change of Control Special Committee, including any decision to employ, maintain, or terminate a poison pill, would be subject to the deferential business judgment rule standard of review. As a consequence, litigation involving the actions taken by the Committee would be rare, if not essentially eliminated, because it could be expected that the decisions made by the Committee would be in the interest of 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, because 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. Also, adoption of this proposal would breathe life into the proposal by Vice Chancellor Laster in In re CNX Gas Corporation Shareholders Litigation, where he suggested that the business judgment rule standard of review be applicable to freeze-out mergers where the transaction is (1) supervised by a special committee with all of the power of an independent board, and (2) conditioned upon the tendering or voting by a majority of the nonaffiliated shareholders.
This article builds on my several of my prior articles, which called for a Congress and the SEC to address conflicts of interest in merger and acquisition transactions by mandating an independent Change of Control Board for public companies, including “Change of Control Board: Federal Preemption of the Law Governing a Target’s Directors” (70 Mississippi Law Journal 35) and “The Missing Link in Sarbanes-Oxley: Enactment of the ‘Change of Control Board’ Concept, or Extension of the Audit Committee Provisions to Mergers and Acquisitions” (63 The Business Lawyer 81).
The full paper is available for download here.