In re Books-A-Million, Inc. Stockholders Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE BOOKS-A-MILLION, INC. ) Consolidated
STOCKHOLDERS LITIGATION ) C.A. No. 11343-VCL

MEMORANDUM OPINION

Date Submitted: September 22, 2016
Date Decided: October 10, 2016

Seth D. Rigrodsky, Brian D. Long, Gina M. Serra, Jeremy J. Riley, RIGRODSKY &
LONG, P.A., Wilmington, Delaware; Brian C. Kerr, BROWER PIVEN, A Professional
Corporation, New York, New York; Attorneys for Plaintiffs.

Raymond J. DiCamillo, Sarah A. Clark, RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Robert L. Dell Angelo, Achyut J. Phadke, MUNGER, TOLLES
& OLSON LLP, Los Angeles, California; Attorneys for Defendants Clyde B. Anderson,
Terrence C. Anderson, Family Acquisition Holdings, Inc., and Family Merger Sub, Inc.

David E. Ross, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Blair
Connelly, Blake T. Denton, LATHAM & WATKINS LLP, New York, New York;
Attorneys for Defendants Ronald G. Bruno, Terrance G. Finley, R. Todd Noden, and
James F. Turner.

William M. Lafferty, Eric Klinger-Wilensky, Kevin M. Coen, Richard Li, MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; B. Warren Pope, Jerrod
M. Lukacs, KING & SPALDING, Atlanta, Georgia; Attorneys for Defendants Ronald J.
Domanico and Edward W. Wilhelm.

LASTER, Vice Chancellor.
 In 2015, the controlling stockholders of Books-A-Million, Inc. (―BAM‖ or the

―Company‖) took the Company private through a squeeze-out merger (the ―Merger‖).

Each publicly held share of common stock was converted into the right to receive $3.25

per share, subject to the potential exercise of appraisal rights.

The plaintiffs are minority stockholders who contend that the Company‘s

directors, its controlling stockholders, and several of its officers breached their fiduciary

duties in connection with the Merger. They also contend that the transaction vehicles that

the controlling stockholders used to complete the Merger aided and abetted the

fiduciaries in breaching their duties. The defendants have moved to dismiss the complaint

for failing to state a claim on which relief can be granted.

The Merger followed the framework approved by the Delaware Supreme Court in

Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014). Consequently, unless the

plaintiffs can plead facts supporting a reasonable inference that one of the elements of the

framework was not met, the business judgment rule provides the operative standard of

review. Under that standard of review, the court will defer to the judgments made by the

corporation‘s fiduciaries unless the Merger is so extreme as to suggest waste.

The plaintiffs‘ complaint has not pled grounds to take the transaction outside of

the M&F Worldwide framework. The business judgment rule applies. The Merger cannot

be viewed as an act of waste. The complaint is therefore dismissed with prejudice.

I. FACTUAL BACKGROUND

The relevant facts are drawn from the currently operative pleading, which is the

Verified Consolidated Amended Class Action Complaint (the ―Complaint‖), and the

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documents it incorporates by reference. The principal document that the Complaint

incorporates is the definitive proxy statement filed with the Securities and Exchange

Commission in connection with the Merger (the ―Proxy Statement‖ or ―Proxy‖). This

court may consider the Proxy Statement to establish what was disclosed to stockholders

and other facts that are not subject to reasonable dispute. See In re Gen. Motors (Hughes)

S’holder Litig., 897 A.2d 162, 170 (Del. 2006); Abbey v. E.W. Scripps Co., 1995 WL

478957, at *1 n.1 (Del. Ch. Aug. 9, 1995).

A. The Company

BAM is a Delaware corporation that is engaged in the retail book business. It

operates over 250 bookstores, principally in the southeastern United States. BAM also

sells books over the internet, engages in wholesale book sales and distribution, and has an

internet development and services company. It owns a majority stake in a yogurt

business, and it also develops and manages real estate through its approximately 95%

stake in Preferred Growth Properties, LLC. Before the Merger, BAM‘s common stock

traded on the NASDAQ Global Select Exchange under the ticker symbol ―BAMM.‖

BAM was founded in 1917 by Clyde W. Anderson, and his descendants (the

―Anderson Family‖) continue to control the Company.1 At all times since BAM‘s initial

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The members of the Anderson Family include Charles C. Anderson; Hilda B.
Anderson; Joel R. Anderson; Ashley Ruth Anderson; Charles C. Anderson, Jr.; Harold M.
Anderson; Kayrita Anderson; Charles C. Anderson, III; Hayley Anderson Milam; Anderson
BAMM Holdings, LLC; the Ashley Anderson Trust; the Lauren A. Anderson Irrevocable Trust;
the Olivia Barbour 1995 Trust; the Alexandra Ruth Anderson Irrevocable Trust; the First
Anderson Grandchildren‘s Trust FBO Charles C. Anderson, III; the First Anderson
Grandchildren‘s Trust FBO Hayley E. Anderson; the First Anderson Grandchildren‘s Trust FBO
Lauren A. Anderson; the Second Anderson Grandchildren‘s Trust FBO Alexandra R. Anderson;

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public offering in 1992, the Anderson Family has controlled a majority of the Company‘s

shares. Collectively, before the Merger, the Anderson Family controlled shares carrying

approximately 57.6% of the Company‘s outstanding voting power. An Anderson Family

vehicle also owns the minority interest in the Company‘s yogurt business.

At the time of the Merger, the board of directors (the ―Board‖) had five members.

Two were members of the Anderson Family: Executive Chairman Clyde B. Anderson

and Terrence C. Anderson. The other three were Ronald G. Bruno, Ronald J. Domanico

and Edward W. Wilhelm. The Complaint names all five directors as defendants.

Bruno joined the Board in 1992. He was formerly the chairman and CEO of a

supermarket chain. At the time of the Merger, he was serving as president of an

investment company and chairman of a sports marketing firm. He also had served for

fourteen years on the board of Russell Corporation and for eighteen years on the board of

SouthTrust Bank.

Domanico joined the Board in 2014. At the time of the Merger, he was serving as

Senior Vice President of Strategic Initiatives and Capital Markets of Recall Corporation,

a management services company, and as a director of NanoLumens, a private LED

display designer and manufacturer. He also had served as CFO of HD Supply for several

years and as CFO and director of Caraustar Industries, Inc. for seven years.

the Third Anderson Grandchildren‘s Trust FBO Taylor C. Anderson; the Fourth Anderson
Grandchildren‘s Trust FBO Carson C. Anderson; the Fifth Anderson Grandchildren‘s Trust FBO
Harold M. Anderson; the Sixth Anderson Grandchildren‘s Trust FBO Bentley B. Anderson; the
Charles C. Anderson Family Foundation; the Joel R. Anderson Family Foundation; and the
Clyde and Summer Anderson Foundation.

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 Wilhelm joined the Board in 2013. At the time of the Merger, he was serving as

CFO of The Finish Line, Inc., an athletic shoe retailer. He is a certified public accountant

with experience in the bookstore industry, including fifteen years as an executive and

nine years as a board member with Borders Group, Inc.

None of the directors were members of management. The Company‘s President

and CEO was defendant Terrance G. Finley. The Company‘s Executive Vice President

and CFO was defendant R. Todd Noden. The Company‘s Executive Vice President of

Real Estate and Business Development was defendant James F. Turner. At the time of the

Merger, Finley, Noden, and Turner owned approximately 6.2% of the Company‘s equity.

They also owned the minority stake in the Company‘s real estate development subsidiary.

In connection with the Merger, Finley, Noden, and Turner agreed to roll over their equity

in the Company in return for equity in the holding company that owns, post-Merger,

100% of the stock of the Company. The executives have maintained their management

positions with the Company.

B. Prior Discussions About A Potential Merger

At various times during the past four years, the Anderson Family and the

Company have discussed a potential business combination. In April 2012, the Anderson

Family proposed to acquire the outstanding BAM shares for $3.05 per share, representing

a 20% premium over BAM‘s closing price the previous day. The Board formed a special

committee, which evaluated the proposal. The special committee concluded that the

proposal undervalued the Company and asked the Anderson Family to raise their price. In

July 2012, after further negotiations, the Anderson Family withdrew their proposal.

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 During the summer of 2013, an entity that the Proxy Statement calls ―Party Y‖

approached BAM about a potential transaction. Party Y appears to have been a financial

buyer. BAM and Party Y entered into a confidentiality agreement, and Party Y visited

BAM‘s facilities and stores. In September, Party Y provided Clyde Anderson with an

expression of interest in acquiring the Anderson Family‘s block for $3.30 per share in

cash. Party Y indicated that it planned to cause the Company to sell its real estate

holdings. Party Y also said that it might be willing to acquire all of the Company‘s

shares. In October, Party Y confirmed its interest in potentially acquiring all of the

Company‘s shares. The Board directed management to engage in discussions with Party

Y. Clyde Anderson also participated in the discussions. According to the Proxy

Statement, ―[t]he Company began to question the seriousness of the discussions when

Party Y did not retain an investment banking firm, and its advisors did not engage in

discussions with the Company‘s advisors, and Party Y made no visible efforts to conduct

diligence.‖ Proxy at 15. ―[O]n December 3, 2013, Clyde B. Anderson informed the Board

that discussions with Party Y would be discontinued.‖ Id.

In early 2014, Party Y approached BAM again. This time, Party Y proposed to

acquire all of the outstanding shares of BAM for $4.15 per share. Consistent with the

position it took when it first approached the Company in summer 2013, Party Y stated

that did not want to retain all of the Company‘s business segments; Party Y only wanted

the retail trade and e-commerce segments. According to the Proxy Statement, ―[t]he

proposal indicated that the buyer did not have sufficient capital to acquire the whole

business.‖ Id. The proposal was subject to the Anderson Family (i) providing a backstop

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commitment to acquire BAM‘s real estate holdings for at least $19 million and (ii)

buying certain other assets for approximately $2.8 million. Id. On April 1, 2014, the

Anderson Family advised the Board that they ―would not support this proposal which

relied on a backstop from [them].‖ Id.

On April 16, 2014, Party Y, the Company‘s general counsel, and members of the

Anderson Family met in person in New York, New York. After the meeting, Party Y

raised its bid to $4.21 per share with the same conditions. The Anderson Family

maintained that they would not support Party Y‘s proposal. The Proxy Statement states:

[O]ur Board unanimously resolved to terminate discussions with Party Y
given, among other things, Party Y‘s lack of substantial assets of its own,
and its apparent inability to identify any source to finance the transaction in
full, the Anderson family‘s unwillingness to sell their shares of the
Company, Party Y‘s reliance on the Anderson Family committing to
acquire the Company‘s real estate holdings for at least $19 million and the
Anderson Family‘s unwillingness to do so.

Id.

C. The Anderson Family’s Proposal

On January 29, 2015, the Board received an unsolicited proposal from the

Anderson Family to acquire the outstanding shares of BAM common stock that they did

not already own for $2.75 per share in a negotiated transaction. The price represented a

64% premium over BAM‘s closing price the day of the bid and a 65% premium over the

average closing price for the past 90 trading days. The proposal anticipated that the

transaction would take the form of merger between the Company and a newly formed

acquisition vehicle, that management would remain in place following the merger, and

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that the transaction would be financed using borrowings available under the Company‘s

existing credit facility. Dkt. 19, Ex. D.

The proposal stated that the Anderson Family expected the Board to establish a

special committee of independent directors with its own financial and legal advisors. The

proposal represented that the Anderson Family ―will not move forward with the

transaction unless it is approved by the Special Committee.‖ Id. The proposal also stated

that ―any definitive acquisition agreement would need to include a non-waivable majority

of the minority vote condition.‖ Id. The proposal stated that the Anderson Family was

only interested in acquiring the shares that it did not already own and that it was not

interested in selling its shares to a third party.

D. The Committee And Its Advisors

On January 30, 2015, the Board met to discuss the Anderson Family‘s proposal.

The Board formed a special committee (the ―Committee‖) to review, evaluate, and

negotiate the terms of a potential transaction. The initial members of the Committee were

the three directors who were not affiliated with the Anderson Family: Bruno, Domanico,

and Wilhelm. The Board authorized the Committee to retain legal and financial advisors,

to establish rules and procedures for the process, and to take any other actions that might

be required. The Board noted that although it expected the Committee to begin work

immediately, it also expected that the members of the Committee would hire their own

legal counsel, who would help craft resolutions specifying the Committee‘s powers and

mandate in greater detail.

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 After the full Board meeting, the Committee met and discussed a process for

selecting a legal advisor. On February 3, 2015, after interviewing two law firms, the

Committee retained King & Spalding LLP. On February 5, the Committee elected

Wilhelm as chair and discussed a process for selecting a financial advisor.

On February 6, 2015, Bruno discussed with King & Spalding his ―social and civic

relationships with the Anderson Family.‖ Proxy at 16. Later that day, King & Spalding

met with Domanico and Wilhelm, without Bruno, to discuss the relationships. They

decided it would be preferable if Bruno did not serve on the Committee. Bruno concurred

and resigned that day.

On February 16, 2015, the Committee retained Morris, Nichols, Arsht & Tunnell

LLP as Delaware counsel. On February 23, after vetting three firms, the Committee

selected Houlihan Lokey to serve as its financial advisor. Before hiring Houlihan Lokey,

the Committee considered that in 2012 and 2013, Houlihan Lokey had provided

transactional advisory services to an entity affiliated with the Anderson Family and

received aggregate fees of approximately $260,000.

On February 24, 2015, King & Spalding forwarded to the Company‘s general

counsel detailed resolutions establishing the Committee‘s authority and mandate.

Pursuant to those resolutions, the Special Committee was authorized to
conduct the evaluation and negotiation of the potential transaction, evaluate
and negotiate the terms of any proposed definitive or other documents in
respect of the proposal (subject to the approval of our Board), report its
recommendations and conclusions to our Board, including a determination
and recommendation as to whether the proposal was fair, advisable and in
the best interest of the Company and the Company‘s stockholders, and
specifically the Company‘s stockholders not affiliated with the Anderson
Family, investigate the Company and the proposal, review, evaluate and, if

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 necessary, negotiate other strategic options available to the Company,
determine, in its sole discretion, to elect not to pursue the proposal and to
retain its own independent legal and financial advisors at the Company‘s
expense. The resolutions also authorized the Special Committee to review,
evaluate and negotiate other strategic options available to the Company. In
addition, the resolutions stated that the Board would not approve the
proposal without a favorable recommendation from the Special Committee.

Proxy at 17. The full Board approved the resolutions by written consent.

E. The Committee Starts Work.

Having retained its legal and financial advisors and clarified the scope of its

authority and mandate, the Committee worked with its advisors to develop a strategy for

evaluating the Anderson Family‘s proposal. Despite the Anderson Family‘s statements

about not intending to sell any shares, the Committee decided to solicit offers for BAM

from various other parties, which would enable the Committee to better assess the value

of BAM and the attractiveness of the Anderson Family‘s offer. Particularly in light of the

Anderson Family‘s plan to finance its proposal using the Company‘s existing credit

facility, the Committee decided to evaluate alternative transaction structures, such as a

leveraged recapitalization or special dividend.

In April 2015, Houlihan Lokey evaluated alternative structures. Houlihan Lokey

also contacted three entities—Parties X, Y, and Z—that had previously expressed interest

in acquiring BAM. All three initially expressed interest in a potential transaction. King &

Spalding informed the Anderson Family‘s counsel about the existence of potential

competition.

Ultimately, only Party Y submitted an indication of interest. In a letter dated April

22, 2015, Party Y proposed to acquire all of the shares of BAM for $4.21 per share,

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conditioned on due diligence, financing the transaction using BAM‘s existing credit

facility, and a no-shop provision in the definitive transaction agreement. A representative

of the Anderson Family called Houlihan Lokey and reiterated that the Anderson Family

was only interested in acquiring the shares it did not already own and was not interested

in selling its shares.

The Committee considered Party Y‘s proposal and the Anderson Family‘s

position. The Committee instructed its advisors to determine whether Party Y would

consider a minority investment. Party Y indicated that it was only interested in

purchasing a controlling stake in the Company.

F. Negotiations With The Anderson Family

The Committee decided that its best course was to negotiate with the Anderson

Family. On April 29, 2015, the Committee decided to reject the Anderson Family‘s

proposal and counter at $3.36 per share. On May 4, in response to the Committee‘s

counteroffer, the Anderson Family increased its offer to $3.10 per share, conditioned on a

right to terminate the transaction if more than 5% of the Company‘s stockholders sought

appraisal. On May 5, the Committee countered at $3.25 per share without any appraisal

rights condition. On May 7, the Anderson Family raised its offer to $3.25 per share but

with the 5% appraisal rights condition.

Negotiations briefly stalled over the inclusion of the appraisal rights condition. On

May 11, 2015, the Committee decided to accept the concept of a condition, but to

negotiate for a higher threshold. On May 13, the parties agreed to increase the appraisal

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rights condition to 10% or more of the outstanding shares. With the key business terms

resolved, counsel began preparing a transaction agreement.

On May 29, 2015, Party Y sent a letter to Houlihan Lokey reaffirming its interest

in acquiring 100% of the shares of BAM for $4.21 per share, subject to the same

conditions set out in its April 22 proposal. Counsel to the Committee and the Anderson

Family continued negotiating the terms of the transaction agreement.

On June 30, 2015, King & Spalding advised the Committee that because the

potential transaction with the Anderson Family would be financed through the use of the

Company‘s existing credit facility, it would be prudent to obtain a solvency opinion. The

Committee instructed King & Spalding to discuss the cost of an opinion with the

Company‘s general counsel.

G. The Committee Approves The Merger.

On July 13, 2015, the Committee members met in person to consider the proposed

transaction. Representatives from King & Spalding advised the Committee regarding

their legal duties and other matters. At that point, as a matter of efficiency, the Committee

invited Bruno to listen to counsel‘s description of the proposed transaction and a

presentation from Houlihan Lokey regarding the fairness of the transaction. Because

Clyde and Terrence Anderson had recused themselves, Bruno was the only other member

of the Board who would need to hear the presentations before considering whether to

approve the Merger. By allowing Bruno to sit in on the presentations, the Committee

members avoided needing to have the advisors go through their presentations a second

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time, just for Bruno, if the Committee decided to recommend the Anderson Family‘s

proposal to the Board.

King & Spalding reviewed the principal terms of the proposed transaction with the

Committee and Bruno. Counsel noted that the closing of the transaction was conditioned

on approval by the holders of a majority of the Company‘s outstanding common stock

not beneficially owned by the purchaser group or the Company‘s Section 16 officers.

Houlihan Lokey advised the Company that no one other than Party Y had submitted an

alternative proposal. The Proxy Statement states:

The Special Committee concluded that the proposal from Party Y was not
viable for various reasons, including the conditions imposed and the fact
that the Anderson Family would be required to sell their ownership interest
in the Company under Party Y‘s proposal (which the Anderson Family had
confirmed that they were unwilling to do).

Proxy at 23.

Houlihan Lokey then presented its financial analysis of the merger consideration.

At the conclusion of its analysis, Houlihan Lokey delivered an oral opinion, subsequently

confirmed in writing, that the $3.25 per share contemplated by the Anderson Family‘s

proposal was fair to the Company‘s minority stockholders from a financial point of view.

At that point, Noden, the Company‘s CFO, joined the meeting to discuss a

proposed solvency opinion from a third-party valuation firm. After his presentation, the

Committee excused Noden, Bruno, and the Houlihan Lokey representatives. The

Committee members then deliberated and voted to recommend the Anderson Family‘s

offer to the full Board.

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 Later on July 13, 2015, the full Board met in person in Birmingham, Alabama to

receive and consider the Committee‘s recommendation. Clyde and Terrence Anderson

abstained from the vote. The other three directors voted in favor of the transaction,

approved the merger agreement, and resolved to recommend it to the Company‘s

stockholders.

H. The Stockholder Vote

The terms of the Merger were set forth in an agreement and plan of merger dated

July 13, 2015 (the ―Merger Agreement‖) between and among the Company and two

acquisition vehicles formed by the Anderson Family: Family Merger Sub, Inc. (―Merger

Sub‖) and Family Acquisition Holdings, Inc. (―Parent‖). The Merger Agreement

contemplated a reverse triangular merger in which Merger Sub would merge with and

into the Company, the separate corporate existence of Merger Sub would cease, and the

Company would survive as a subsidiary of Parent. The merger consideration of $3.25 per

share valued the Company‘s minority interest at $21 million. The Merger was financed

through borrowings under the Company‘s credit facilities. In connection with the Merger,

the Company‘s three top executives (Finley, Nolen, and Turner) entered into roll-over

agreements in which they committed to contribute their BAM common stock to Parent in

return for an equity interest in Parent. The members of the Anderson Family entered into

a voting agreement in which they committed to voting all of their common stock in favor

of the Merger. Clyde and Terrence Anderson executed the voting agreement on behalf of

the members of the Anderson Family.

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 On August 21, 2015, BAM filed a 93-page preliminary proxy statement with the

SEC. On August 27, 2015, the Company obtained a solvency opinion from Cappello

Group, Inc. On October 22, BAM filed its definitive proxy statement, followed by a

revised version on October 23.

The Merger Agreement was submitted to the Company‘s stockholders at a

meeting held on December 8, 2015. Holders of approximately 66.3% of the shares who

were not affiliated with the Anderson Family or any Section 16 officer of the Company

approved the Merger. The transaction closed on December 10.

I. This Litigation

A stockholder plaintiff filed suit in July 2015 and another in October. The same

law firms represented both plaintiffs. In February 2016, the cases were consolidated.

After the defendants moved to dismiss the consolidated complaint and filed their opening

briefs, the plaintiffs elected to amend their complaint, resulting in the currently operative

pleading. The defendants renewed their motions to dismiss.

II. LEGAL ANALYSIS

The defendants have moved to dismiss the complaint for failing to state a claim on

which relief can be granted. See Ct. Ch. R. 12(b)(6). When considering such a motion,

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague
allegations are well-pleaded if they give the opposing party notice of the
claim; (iii) the Court must draw all reasonable inferences in favor of the
non-moving party; and [(iv)] dismissal is inappropriate unless the plaintiff
would not be entitled to recover under any reasonably conceivable set of
circumstances susceptible of proof.

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Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal

quotation marks omitted).

The Complaint names eight individuals and two entities as defendants. The

individual defendants are (i) Domanico and Wilhelm, as the two members of the

Committee who negotiated and recommended the Merger, (ii) Bruno, as a director who

voted with Domanico and Wilhelm to approve the Merger, (iii) Clyde Anderson and

Terrence Anderson, as the representatives of the Anderson Family, and (iv) Finley,

Noden, and Turner, as members of management. The two entity defendants are the two

acquisition vehicles, Parent and Merger Sub.

The Complaint contains three counts. Count I asserts that all of the individual

defendants breached their fiduciary duties in connection with the Merger. Count I

primarily focuses on the members of the Committee, but it also alleges that Bruno tainted

the Committee‘s process and contends that all three directors breached their duties by

voting in favor of the Merger at the Board level. Count I also alleges that the three

executives breached their duties by rolling over their shares as part of the Merger. It

further contends that Clyde and Terrence Anderson somehow breached their duties as

directors, even though they did not participate in the process as directors and recused

themselves from the vote. Count II separately contends that the Andersons breached their

fiduciary duties under the more comprehensible theory that they did so as controlling

stockholders. Compl. ¶ 114. Count III alleges that the acquisition vehicles aided and

abetted the individual defendants in breaching their duties.

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 In this case, it is not necessary to parse finely among the defendants and counts.

The plaintiffs‘ core contention is that the fiduciaries involved in the Merger breached

their duties. The members of the Anderson Family, embodied by Clyde and Terrence

Anderson, breached their fiduciary duties as the Company‘s controlling stockholders by

proposing, negotiating, and engaging in the Merger. The committee members breached

their fiduciary duties by negotiating the Merger and recommending it to the Board. And

the members of the Board who followed the Committee‘s recommendation breached their

fiduciary duties by approving the Merger and recommending it to the stockholders. If that

central theory fails to state a claim, then the members of management cannot have

breached their fiduciary duties by rolling over their shares as part of a transaction

untainted by any other breach. Likewise, if there is no underlying breach of duty, then the

acquisition vehicles cannot have aided and abetted anything.

Whether the plaintiffs‘ core contention states a claim for breach of fiduciary duty

depends on the applicable standard of review. Ordinarily, when a controlling stockholder

takes a company private, the operative standard of review is the entire fairness test. See

Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997). In M&F Worldwide, the

Delaware Supreme Court held that the business judgment rule would provide the

operative standard of review if the controller satisfied the following six elements:

(i) the controller conditions the procession of the transaction on the
approval of both a Special Committee and a majority of the minority
stockholders; (ii) the Special Committee is independent; (iii) the Special
Committee is empowered to freely select its own advisors and to say no
definitely; (iv) the Special Committee meets its duty of care in negotiating a
fair price; (v) the vote of the minority is informed; and (vi) there is no
coercion of the minority.

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88 A.3d at 645. When the business judgment rule provides the operative standard of

review, then a court will not consider the substance of the transaction unless its terms are

so extreme as to constitute waste and thereby support an inference of subjective bad faith.

See In re MFW S’holders Litig., 67 A.3d 496, 519 & nn.107 & 109 (Del. Ch. 2013)

(Strine, C.), aff’d sub nom. M&F Worldwide, 88 A.3d 635 (Del. 2014).

Compliance with the M&F Worldwide structure can be tested on a motion to

dismiss.2 If the defendants have described their adherence to the elements identified in

M&F Worldwide ―in a public way suitable for judicial notice, such as board resolutions

and a proxy statement,‖ then the court will apply the business judgment rule at the motion

to dismiss stage unless the plaintiff has ―pled facts sufficient to call into question the

existence of those elements.‖ Swomley, 2014 WL 4470947, at *20.

In this case, the allegations of the Complaint do not support a reasonably

conceivable inference that any of the M&F Worldwide conditions were not met. The

business judgment rule therefore applies. The Complaint also does not support a

reasonably conceivable inference that the Merger constituted waste. Consequently, the

defendants‘ motion is granted.

2
Swomley v. Schlecht, 2014 WL 4470947, at *20 (Del. Ch. Aug. 27, 2014)
(TRANSCRIPT), aff’d, 128 A.3d 992 (Del. 2015) (TABLE); see MFW, 67 A.3d at 504
(explaining that one purpose of the M&F Worldwide structure was to remedy a doctrinal
situation in which there was ―no feasible way for defendants to get [cases] dismissed on the
pleadings‖); see also In re Cox Commcn’s, Inc. S’holders Litig., 879 A.2d 604, 618, 628, 633,
644, 647 (Del. Ch. 2005) (proposing the framework eventually adopted in M&F Worldwide and
noting problems with the then-existing regime under which defendants lacked a meaningful
chance of prevailing on a motion to dismiss).

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A. The Dual Upfront Conditions

The first requirement of M&F Worldwide is that the controller condition the

transaction ―ab initio upon both the approval of an independent, adequately-empowered

Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a

majority of the minority stockholders.‖ 88 A.3d at 644.

The offer letter dated January 29, 2015, that the Anderson Family sent to the

Company conditioned any transaction, from the outset, on approval by both a special

committee of independent directors and a non-waivable vote of disinterested

stockholders. The operative text in the Anderson Family‘s offer letter was substantively

identical to what was held to be sufficient in M&F Worldwide. See MFW, 67 A.3d at 506.

The Complaint does not allege that the Anderson Family delayed establishing the

conditions, wavered from them, or sought to circumvent them.

The plaintiffs‘ sole argument on the first element is that the 2015 proposal was a

continuation of the Anderson Family‘s 2012 proposal, which did not have the twin

conditions necessary for the M&F Worldwide framework. That is not a reasonably

conceivable inference. The Complaint recognizes that a special committee rejected the

2012 offer, thereby terminating it. See, e.g., ARTHUR LINTON CORBIN, CORBIN ON

CONTRACTS § 3.41 (Matthew Bender 2016) (explaining that ―a definite rejection

terminates the offeree‘s power to accept‖). The 2015 offer came nearly three years after

the 2012 offer and contained a different price and different terms. The 2015 proposal was

a different offer, and it generated a separate process. The first requirement for the M&F

Worldwide framework is therefore satisfied.

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B. The Committee’s Independence

The second requirement under M&F Worldwide is that the members of the special

committee are disinterested and independent. 88 A.3d at 645. To plead that a director is

interested in a manner sufficient to challenge the M&F Worldwide framework, a plaintiff

must allege facts supporting a reasonably conceivable inference that the director received

―a personal financial benefit from a transaction that is not equally shared by the

stockholders.‖3 To plead that a director is not independent in a manner sufficient to

challenge the M&F Worldwide framework, a plaintiff must allege facts supporting a

reasonable inference that a director is sufficiently loyal to, beholden to, or otherwise

3
Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993) (citations omitted); accord Cede &
Co. v. Technicolor, Inc., 634 A.2d 345, 362 (Del. 1993) (―Classic examples of director self-
interest in a business transaction involve either a director appearing on both sides of a transaction
or a director receiving a personal benefit from a transaction not received by the shareholders
generally.‖) (footnotes omitted); Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984) (―Directorial
interest exists whenever . . . a director either has received, or is entitled to receive, a personal
financial benefit from the challenged transaction which is not equally shared by the
stockholders.‖) (footnote omitted). ―[A] subjective ‗actual person‘ standard [is used] to
determine whether a ‗given‘ director was likely to be affected in the same or similar
circumstances.‖ McMullin v. Beran, 765 A.2d 910, 923 (Del. 2000) (citing Cinerama, Inc. v.
Technicolor, Inc., 663 A.2d 1156, 1167 (Del. 1995)). ―[T]he benefit received by the director and
not shared with stockholders must be ‗of a sufficiently material importance, in the context of the
director‘s economic circumstances, as to have made it improbable that the director could perform
her fiduciary duties . . . without being influenced by her overriding personal interest.‘‖ In re
Trados Inc. S’holder Litig., 2009 WL 2225958, at *6 (Del. Ch. July 24, 2009) (quoting In re
Gen. Motors Class H S’holders Litig., 734 A.2d 611, 617 (Del. Ch. 1999)).

In Brehm v. Eisner, the Delaware Supreme Court overruled seven precedents, including
Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984) and Pogostin, to the extent they reviewed a
Rule 23.1 decision by the Court of Chancery under an abuse of discretion standard or otherwise
suggested deferential appellate review. 746 A.2d 244, 253 n.13 (Del. 2000),. The Brehm court
held that, going forward, appellate review of a Rule 23.1 determination would be de novo and
plenary. Id. at 253. This decision does not rely on Aronson or Pogostin for the standard of
appellate review and therefore omits the cumbersome subsequent history.

19
influenced by an interested party so as to undermine the director‘s ability to judge the

matter on its merits.4

The plaintiffs do not directly challenge the independence or disinterestedness of

Wilhelm or Domanico, who were the two individuals who served on the Committee,

negotiated with the Anderson Family, and decided to recommend the Anderson Family‘s

offer to the Board. The Complaint does not allege, for example, that Wilhelm or

Domanico are related to the Anderson Family. They each held a 0.2% interest in BAM

4
Aronson, 473 A.2d at 815 (stating that one way to allege successfully that an individual
director is under the control of another is by pleading ―such facts as would demonstrate that
through personal or other relationships the directors are beholden to the controlling person‖);
accord Friedman v. Beningson, 1995 WL 716762, at *4 (Del. Ch. Dec. 4, 1995) (Allen, C.)
(―The requirement that directors exercise independent judgment, (insofar as it is a distinct
prerequisite to business judgment review from a requirement that directors exercise financially
disinterested judgment), directs a court to an inquiry into all of the circumstances that are alleged
to have inappropriately affected the exercise of board power. This inquiry may include the
subject whether some or all directors are ‗beholden‘ to or under the control, domination or strong
influence of a party with a material financial interest in the transaction under attack, which
interest is adverse to that of the corporation.‖). A classic example is a close familial relationship.
See, e.g., Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 889 (Del. Ch. 1999) (―That Hudson
also happens to be Huizenga‘s brother-in-law makes me incredulous about Hudson‘s
impartiality. Close familial relationships between directors can create a reasonable doubt as to
impartiality. The plaintiff bears no burden to plead facts demonstrating that directors who are
closely related have no history of discord or enmity that renders the natural inference of mutual
loyalty and affection unreasonable.‖) (footnote omitted); Chaffin v. GNI Gp., Inc., 1999 WL
721569, at *5 (Del. Ch. Sept. 3, 1999) (holding that a father-son relationship was sufficient to
rebut the presumption of independence: ―Inherent in the parental relationship is the parent‘s
natural desire to help his or her child succeed. . . . [M]ost parents would find it highly difficult, if
not impossible, to maintain a completely neutral, disinterested position on an issue, where his or
her own child would benefit substantially if the parent decides the issue a certain way‖); see also
London v. Tyrrell, 2010 WL 877528, at *14 n.60 (Del. Ch. Mar. 11, 2010) (―[I]n the pre-suit
demand context, plaintiffs can often meet their burden of establishing a lack of independence
with a simple allegation of a familial relationship. Surely then . . . it will be nigh unto impossible
for a corporation bearing the burden of proof to demonstrate that an SLC member is independent
in the face of plaintiffs‘ allegation that the SLC member and a director defendant have a family
relationship.‖).

20
common stock at the time of the Merger, but their stock was not treated any differently

than the minority shares. Although the Complaint notes in a footnote that each member of

the Committee ―receive[d] $35,000 in cash‖ for serving, the payment was not contingent

on the success of the Merger. Compl. ¶ 62 n.2; Proxy at 53. See Swomley, 2014 WL

4470947, at *21 (holding that receipt of a non-contingent fee by a special committee

member does not render that committee member interested or not independent).

Instead, the plaintiffs raise two collateral attacks on the independence and

disinterestedness of the Committee: (i) they allege that Bruno, who purportedly was not

independent, tainted the independence of the Committee by sitting in on Houlihan

Lokey‘s fairness opinion presentation; and (ii) they allege that Wilhelm and Domanico

approved the Merger in bad faith, thereby displaying a lack of independence in fact.

In challenging the independence of Bruno, the plaintiffs point to language in the

Proxy disclosing that Bruno resigned from the Committee after identifying his ―social

and civic relationships with the Anderson Family.‖ Precisely because Bruno resigned

from the Committee at an early stage, this decision need not determine whether the

Complaint supports a reasonably conceivable inference that Bruno could not be

independent. He only served on the Committee for a matter of days, and he did not

participate in the negotiation of the Merger. He voluntarily resigned after receiving

feedback from his fellow Committee members that it would be preferable if he did not

serve. That was a commendable step for Bruno and the Committee to take. The same

thing happened in MFW, where a director initially was appointed to the special

committee because he was independent under the rules of the New York Stock Exchange,

21
but resigned shortly thereafter when it was determined that he had ―some current

relationships that could raise questions about his independence for purposes of serving on

the special committee.‖ 67 A.3d at 507. Just as a prompt resignation did not undermine

the effectiveness of the M&F Worldwide framework in the seminal case, it does not

undermine the Committee‘s independence here.

The plaintiffs argue that Bruno tainted the Committee‘s independence by sitting in

on Houlihan Lokey‘s fairness presentation after the negotiations were completed. Clyde

and Terrence Anderson had recused themselves from the sale process because of their

role on the buy side, leaving Wilhelm, Domanico, and Bruno to comprise the quorum

necessary for transactional approval. As a member of the Board who ultimately would

vote on the Merger, Bruno needed to hear the fairness presentation.

To create a truly pristine process, Houlihan Lokey could have given its

presentation twice: once to Wilhelm and Domanico as members of the Committee, then,

if they recommended the transaction, a second time to Wilhelm, Domanico, and Bruno as

members of the Board. The directors decided to avoid the need for a repeat performance

by having Bruno sit in when Houlihan Lokey made its presentation to the Committee.

After hearing the presentation, Bruno was excused, as was Houlihan Lokey and Noden,

the Company‘s CFO. Wilhelm and Domanico then deliberated and voted to accept the

Anderson Family‘s offer. Under different circumstances, the participation of a director

whose independence was compromised might be problematic. But in this case, the

allegations of the Complaint do not support a reasonably conceivable inference that

having Bruno present solely for Houlihan Lokey‘s fairness presentation prevents the

22
Merger from meeting this element of the M&F Worldwide test.

The plaintiffs‘ second argument regarding Wilhelm and Domanico‘s independence

and disinterestedness goes to the core of their case. The plaintiffs contend that even if

Wilhelm and Domanico appeared to be independent, disinterested, and uninfluenced by

Bruno‘s purportedly tainting presence, that appearance is belied by their bad faith actions.

The plaintiffs allege that by recommending the Anderson Family‘s offer, Wilhelm and

Domanico elevated the interests of the Anderson Family over those of the minority

stockholders, so they must have lacked independence in fact.

It is not immediately clear how an argument regarding bad faith fits within the

M&F Worldwide framework. The Delaware Supreme Court did not discuss whether a

plaintiff could seek to call into question the independence of a director by contending that

although appearing independent, the director did not in fact act independently for the

benefit of the stockholders but rather in pursuit of some other interest, such as to benefit

the controlling stockholder. The trial court opinion did not devote significant attention to

the issue, but it did state, after concluding that the committee in that case had met its duty

of care, that ―[b]ecause the special committee was comprised entirely of independent

directors, there is no basis to infer that they did not attempt in good faith to obtain the

most favorable price they could secure for the minority or believe they had done so.‖

MFW, 67 A.3d at 516.

In light of this comment, it seems that the difficult route of pleading subjective bad

faith is theoretically viable means of attacking the M&F Worldwide framework. This

makes sense, because pleading facts sufficient to support an inference of subjective bad

23
faith is one of the traditional ways that a plaintiff can establish disloyalty sufficient to

rebut the business judgment rule.5 ―[T]he duty of loyalty mandates that the best interest

of the corporation and its shareholders takes precedence over any interest possessed by a

director, officer or controlling shareholder and not shared by the stockholders generally.‖

Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (citations omitted).

―[T]he requirement to act in good faith is a subsidiary element, i.e., a condition, of the

fundamental duty of loyalty.‖ Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006) (internal

quotation marks and citations omitted). Subjective bad faith can take the form of ―an

intent to harm‖ or an ―intentional dereliction of duty.‖6 ―A failure to act in good faith

may be shown, for instance, where the fiduciary intentionally acts with a purpose other

5
See In re Walt Disney Co. Derivative Litig. (Disney II), 906 A.2d 27, 53 (Del. 2006).
(―Our law clearly permits a judicial assessment of director good faith for that former purpose [of
rebutting the business judgment rule].‖); eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 40
(Del. Ch. 2010) (―Under Delaware law, when a plaintiff demonstrates the directors made a
challenged decision in bad faith, the plaintiff rebuts the business judgment rule presumption, and
the burden shifts to the directors to prove that the decision was entirely fair to the corporation
and its stockholders.‖); In re Walt Disney Co. Derivative Litig. (Disney I), 907 A.2d 693, 760–79
(Del. Ch. 2005), aff’d, 906 A.2d 27 (Del. 2006) (conducting a director-by-director analysis to
determine if the individual members of the board, none of whom were directly interested in the
hiring or termination of the corporation‘s President, acted in bad faith).
6
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 240 (Del. 2009); accord Disney II, 906
A.2d at 64–66 (defining ―subjective bad faith‖ as ―conduct motivated by an actual intent to do
harm,‖ which ―constitutes classic, quintessential bad faith,‖ and ―intentional dereliction of duty‖
as ―a conscious disregard for one‘s responsibilities‖); see also Stone, 911 A.2d at 370 (holding,
in the context of an oversight claim, that ―utter[] fail[ure] to implement any reporting or
information system or controls‖ or, ―having implemented such a system or controls, conscious[]
fail[ure] to monitor or oversee its operations‖ demonstrated ―a conscious disregard‖ for
directors‘ fiduciary responsibilities).

24
than that of advancing the best interests of the corporation.‖7 ―It makes no difference the

reason why the director intentionally fails to pursue the best interests of the corporation.‖8

Bad faith can be the result of ―any human emotion [that] may cause a director to place his

own interests, preferences or appetites before the welfare of the corporation,‖ including

greed, ―hatred, lust, envy, revenge, . . . shame or pride.‖9

In this case, the centerpiece of the plaintiffs‘ argument that the independent

directors acted in bad faith is Party Y‘s offer, which the Complaint describes as a

―substantially superior offer—$0.96 more per share, or nearly 30% higher than the

Anderson Family‘s offer.‖ Compl. ¶ 4. The Complaint contends that it is not rational for

a director to take a lower priced offer when a comparable, higher priced offer is available.

Because no one rationally would do that, the plaintiffs contend that the independent

7
Disney II, 906 A.2d at 67 (quoting Disney I, 907 A.2d at 755); accord Stone, 911 A.2d
at 369 (―A failure to act in good faith may be shown, for instance, where the fiduciary
intentionally acts with a purpose other than that of advancing the best interests of the corporation
. . . .‖) (quoting Disney II, 906 A.2d at 67); see Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049,
1051 n.2 (Del. Ch. 1996) (Allen, C.) (defining a ―bad faith‖ transaction as one ―that is authorized
for some purpose other than a genuine attempt to advance corporate welfare or is known to
constitute a violation of applicable positive law‖) (emphasis omitted); In re RJR Nabisco, Inc.
S’holders Litig., 1989 WL 7036, at *15 (Del. Ch. Jan. 31, 1989) (Allen, C.) (explaining that the
business judgment rule would not protect ―a fiduciary who could be shown to have caused a
transaction to be effectuated (even one in which he had no financial interest) for a reason
unrelated to a pursuit of the corporation‘s best interests‖).
8
Disney I, 907 A.2d at 754; see Nagy v. Bistricer, 770 A.2d 43, 48 n.2 (Del. Ch. 2000)
(―[R]egardless of his motive, a director who consciously disregards his duties to the corporation
and its stockholders may suffer a personal judgment for monetary damages for any harm he
causes,‖ even if for a reason ―other than personal pecuniary interest.‖).
9
RJR Nabisco, 1989 WL 7036, at *15; see Guttman v. Huang, 823 A.2d at 506 n.34
(―The reason for the disloyalty (the faithlessness) is irrelevant, [and] the underlying motive (be it
venal, familial, collegial, or nihilistic) for conscious action not in the corporation‘s best interest
does not make it faithful, as opposed to faithless.‖).

25
directors must have had some ulterior motive for not pursuing Party Y‘s offer. As the

plaintiffs see it, the failure to pursue Party Y‘s offer supports an inference that the

independent directors disloyally favored the interests of the Anderson Family. Although

they may have been independent in appearance, the plaintiffs seek an inference that they

were not independent in fact.

Chancellor Allen addressed the duties of directors under comparable

circumstances in Mendel v. Carroll, 651 A.3d 297 (Del. Ch. 1994). The case arose out of

a proposal by members of the Carroll family, who were the controlling stockholders of

Katy Industries, Inc. (―Katy‖), to acquire all of Katy‘s unaffiliated shares for $22 each.

The family informed the board that they only were interested in buying and had no

interest in selling any of their shares. The board appointed a special committee, which

negotiated with the family and eventually agreed to a transaction at $25.75 per share.

After the special committee had reached its deal with the Carroll family, an

acquisition vehicle sponsored by Pensler Capital Corporation proposed to purchase all of

Katy‘s outstanding shares for at least $29 per share. The higher price led the special

committee to determine that it could no longer endorse the merger with the Carroll

family. After changing its investment partner, Pensler reduced its offer to $28, then to

$27.80.

With the special committee having withdrawn its recommendation, the Carroll

family exercised its right to terminate its merger agreement with Katy. Over the Carroll

family‘s objection, the board authorized the special committee to negotiate with Pensler.

To get around the Carroll family‘s refusal to sell, Pensler proposed that Katy issue it an

26
option to purchase a number of Katy shares at the transaction price which, if exercised,

would be sufficient to dilute the Carroll family‘s ownership to approximately 40%. Not

surprisingly, the Carroll family strongly objected to that course of action, contending that

it would constitute a breach of fiduciary duty. The special committee was willing to

pursue the idea, as long as Delaware counsel could opine that the option was legal. When

the committee‘s Delaware counsel could not render a definitive opinion, the Pensler deal

fell apart, and the committee discontinued the negotiations. The board resolved instead to

declare a special dividend of $14 per share.

A stockholder plaintiff sought a mandatory injunction requiring the Katy board to

issue the dilutive option to facilitate the Pensler transaction. Citing Revlon, Inc. v.

MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), the plaintiff argued

that the board had breached its fiduciary duties by not issuing the dilutive option because

the Pensler deal constituted the best transaction reasonably available for the minority

stockholders. Chancellor Allen held that Revlon did not apply, but he agreed that the

―obligation the board faces is rather similar‖ to ―the obligation that the board assumes

when it bears what have been called ‗Revlon duties.‘‖ Mendel, 651 A.3d at 306. This was

because

if the board were to approve a proposed cash-out merger, it would have to
bear in mind that the transaction is a final-stage transaction for the public
shareholders. Thus, the time frame for analysis, insofar as those
shareholders are concerned, is immediate value maximization. The
directors are obliged in such a situation to try, within their fiduciary
obligation, to maximize the current value of the minority shares.

Id. (emphasis in original).

27
 The critical issues were how far directors could go ―within their fiduciary

obligation‖ to maximize the value of the minority shares and whether their powers

included the ability to facilitate a third-party transaction by diluting an existing control

block. Chancellor Allen did not rule out the power of a board to dilute a majority holder.

As he had in three prior decisions, Chancellor Allen explained that incumbent directors

could not dilute an existing block of stock for the purpose of maintaining their control,

but they could permissibly dilute a dominant block if the directors acted ―in good faith

and on the reasonable belief that a controlling shareholder is abusing its power and is

exploiting or threatening to exploit the vulnerability of minority shareholders.‖10 Under

this rubric, if the Carroll family‘s refusal to sell their shares could be considered an abuse

of power or exploitation of the minority, then Katy‘s board could have authorized the

dilutive option and a court would have the ability, on an appropriate factual record, to

issue mandatory injunctive relief.

Chancellor Allen concluded that the Carroll family‘s proposal and its refusal to

support the Pensler offer did not present the type of ―threat of exploitation or even

unfairness towards a vulnerable minority that might arguably justify discrimination

against a controlling block.‖ Mendel, 651 A.2d at 304. He began by explaining why the

10
Id. at 304. The earlier cases in which Chancellor Allen had expressed similar views
were Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 662 n.5 (Del. Ch. 1988), Freedman v.
Rest. Assocs. Indus., Inc., 1987 WL 14323, at *8 (Del. Ch. Oct. 16, 1987); and Philips v.
Insituform of N. Am., Inc., 1987 WL 16285, at *8 (Del. Ch. Aug. 27, 1987). Chancellor Allen
drew support for the underlying premise that a board could deploy corporate power to address a
threat posed by an existing stockholder from Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946
(Del. 1985).

28
two offers were not directly comparable, such that the Carroll family‘s refusal to support

the numerically higher Pensler offer could not by itself give rise to an inference of

exploitation or unfairness:

Plaintiffs see in the Carroll Group‘s unwillingness to sell at $27.80 or to
buy at that price, a denial of plaintiffs‘ ability to realize such a price, and
see this as exploitation or breach of duty. This view implicitly regards the
$27.80 per share price and the Carroll Family Merger price of $25.75 as
comparable sorts of things. But they are legally and financially quite
different. It is, for example, quite possible that the Carroll $25.75 price
may have been fair, even generous, while the $27.80 Pensler price may be
inadequate. If one understands why this is so, one will understand one
reason why the injunction now sought cannot be granted.

The fundamental difference between these two possible transactions arises
from the fact that the Carroll Family already in fact had a committed block
of controlling stock. Financial markets in widely traded corporate stock
accord a premium to a block of stock that can assure corporate control.
Analysts differ as to the source of any such premium but not on its
existence. Optimists see the control premium as a reflection of the
efficiency enhancing changes that the buyer of control is planning on
making to the organization. Others tend to see it, at least sometimes, as the
price that a prospective wrongdoer is willing to pay in order to put himself
in the position to exploit vulnerable others, or simply as a function of a
downward sloping demand curve demonstrating investors‘ heterogeneous
beliefs about the subject stock‘s value. In all events, it is widely understood
that buyers of corporate control will be required to pay a premium above
the market price for the company‘s traded securities.

The law has acknowledged, albeit in a guarded and complex way, the
legitimacy of the acceptance by controlling shareholders of a control
premium.

The significant fact is that in the Carroll Family Merger, the buyers were
not buying corporate control. With either 48% or 52% of the outstanding
stock they already had it. Therefore, in evaluating the fairness of the Carroll
proposal, the Special Committee and its financial advisors were in a
distinctly different position than would be a seller in a transaction in which
corporate control was to pass.

The Pensler offer, of course, was fundamentally different. It was an offer,
in effect, to the controlling shareholder to purchase corporate control, and

29
 to all public shareholders, to purchase the remaining part of the company‘s
shares, all at a single price. It distributed the control premium evenly over
all shares. Because the Pensler proposed $27.80 price was a price that
contemplated not simply the purchase of non-controlling stock, as did the
Carroll Family Merger, but complete control over the corporation, it was
not fairly comparable to the per-share price proposed by the Carroll Group.

Id. at 304–05 (citations omitted).

The fact that the offers were fundamentally different, however, did not end the

analysis. As Chancellor Allen explained, ―[t]o note that these proposals are

fundamentally different does not, of course, mean that the board owes fiduciary duties in

one instance but not the other.‖ Id. at 305. Instead, the directors were ―obligated to take

note of the circumstance that the proposal was being advanced by a group of shareholders

that constituted approximately 50% of all share ownership,‖ and that in that

circumstance, ―the board‘s duty was to respect the rights of the Carroll Family, while

assuring that if any transaction of the type proposed was to be accomplished, it would be

accomplished only on terms that were fair to the public stockholders and represented the

best available terms from their point of view.‖ Id. The rights of the Carroll family

included the right not to have to sell their shares.11

11
Mendel, 651 A.2d at 306 (―No part of their fiduciary duty as controlling shareholders
requires them to sell their interest.‖); accord Bershad v. Curtiss-Wright Corp., 535 A.2d 840,
844–45 (Del. 1987); MFW, 67 A.3d at 508; see Jedwab v. MGM Grand Hotels, Inc., 509 A.2d
584, 598 (Del. Ch. 1986) (Allen, C.) (―While the law requires that corporate fiduciaries observe
high standards of fidelity and, when self-dealing is involved, places upon them the burden of
demonstrating the intrinsic fairness of transactions they authorize, the law does not require more
than fairness. Specifically, it does not, absent a showing of culpability, require that directors or
controlling shareholders sacrifice their own financial interest in the enterprise for the sake of the
corporation or its minority shareholders.‖); see also In re Trans World Airlines, Inc. S’holders
Litig., 1988 WL 111271, at *8 (Del. Ch. Oct. 21, 1988) (―[A] controlling shareholder who bears
fiduciary obligations . . . also has rights that may not be ignored . . . includ[ing] a right to

30
 The board‘s fiduciary obligation to the corporation and its shareholders, in
this setting, requires it to be a protective guardian of the rightful interest of
the public shareholders. But while that obligation may authorize the board
to take extraordinary steps to protect the minority from plain overreaching,
it does not authorize the board to deploy corporate power against the
majority stockholders, in the absence of a threatened serious breach of
fiduciary duty by the controlling stock.

Mendel, 651 A.2d at 306. Chancellor Allen found no indication that the $25.75 price that

the Carroll family proposed to pay was an inadequate or unfair price for the non-

controlling stock, or that the Carroll family had abused its control by proposing the

transaction or refusing to sell.

Applied to this case, Mendel‘s teachings defeat any reasonably conceivable

inference of bad faith. Like the Carroll family in Mendel, the Anderson Family did not

breach its duties by refusing to sell its shares to Party Y. Also like the Carroll family, the

Anderson Family did not breach any duty to the corporation or its minority, nor did it

overreach or threaten exploitation, by proposing a going-private transaction at a

substantial premium to the market price. Since Mendel, the Delaware Supreme Court has

approved the M&F Worldwide framework as a means of implementing a non-coercive,

arms‘ length process for negotiating a squeeze-out. The Anderson Family followed the

M&F Worldwide framework and conditioned its proposal on both an affirmative

recommendation by an independent committee and the affirmative vote of a majority of

the Company‘s unaffiliated shares. The Anderson Family thus ensured up front that the

effectuate a [squeeze-out] so long as the terms are intrinsically fair to the minority considering
all relevant circumstances . . . .‖).

31
Company‘s minority stockholders would be able to determine for themselves whether to

accept any offer that the committee recommended. Having followed M&F Worldwide,

the members of the Anderson Family have an even stronger argument than the Carroll

family that they did not overreach or exploit the minority by making their proposal.

Under the rule of law articulated in Mendel, the Committee could not have acted

loyally by deploying corporate power against the Anderson Family to facilitate a third-

party deal. The Committee could explore third-party offers to test whether the members

of the Anderson Family would stick to their buyer-only stance when presented with an

opportunity to sell. The Committee also could use a third-party offer to assess the value

of the Company and determine whether the Anderson Family‘s bid was so low as to

warrant rejecting it outright without presenting it to the minority. This is what the

Committee did. Rather than supporting an inference of bad faith, the Committee‘s actions

support an inference of good faith.

To defeat the logic of Mendel, the plaintiffs have argued that it cannot be assumed

that Party Y‘s offer incorporated a control premium and that the Proxy Statement does

not support such an inference. To the contrary Delaware law recognizes that third party

offers typically include a control premium12 and that that minority shares conversely

12
See, e.g., Paramount Commc’ns Inc. v. QVC Network, Inc., 637 A.2d 34, 43 (Del.
1994) (―The acquisition of majority status and the consequent privilege of exerting the powers of
majority ownership come at a price. That price is usually a control premium . . . .‖); Cheff v.
Mathes, 199 A.2d 548, 555 (Del. 1964) (―[I]t is elementary that a holder of a substantial number
of shares would expect to receive the control premium as part of his selling price . . . .‖); In re
Marriott Hotel Props. II Ltd. P’ship Unitholders Litig., 1996 WL 342040, at *4 (Del. Ch. June

32
trade at a discount when a dominant or controlling stockholder is present.13 Scholars have

documented the same propositions14 with the premiums and discounts varying across

12, 1996) (―[T]he right to direct the management of the firm‘s assets . . . gives rise to the
phenomena of control premia.‖).
13
See, e.g., ONTI, Inc. v. Integra Bank, 751 A.2d 904, 912 (Del. Ch. 1999) (―[B]ecause
the market ascribed a control premium to the publicly-held majority ownership, it similarly
ascribed a minority share discount to the publicly-traded shares . . . .‖); Robotti & Co., LLC v.
Gulfport Energy Co., 2007 WL 2019796, at *2 (Del. Ch. July 3, 2007) (―References to trading
price may not be especially useful . . . in this instance, because the trading . . . was limited and
[the company] had a control shareholder.‖); Andaloro v. PFPC Worldwide, Inc., 2005 WL
2045640, at *8 (Del. Ch. Aug. 19, 2005) (Strine, V.C.) (pointing out that in the appraisal context,
―the fair value standard itself is, in many respects, a pro-petitioner standard that takes into
account that many transactions giving rise to appraisal involve mergers effected by controlling
stockholders. The elimination of minority discounts, for example, represents a deviation from the
fair market value of minority shares as a real world matter in order to give the minority a pro rata
share of the entire firm‘s value—their proportionate share of the company valued as a going
concern.‖); Klang v. Smith’s Food & Drug Ctrs., Inc., 1997 WL 257463, at *11 (Del. Ch. May
13, 1997) (recognizing that ―factors that tend to minimize or discount [a] premium [include] the
fact that the . . . stock price contain[s] a minority trading discount as a result of [a party‘s]
control‖ of a company); MacLane Gas Co. Ltd., Partnership v. Enserch Corp., 1992 368614, at
*9 (Del. Ch. Dec. 9, 1992) (finding that the ―the stock price . . . was not a reliable indication of
the value of the [shares of the company at issue because] . . . the trading price contained an
implicit minority discount as a result of [the defendant‘s] control over [the company]‖); see also
Goemaat v. Goemaat, 1993 WL 339306, at *6 (Del. Fam. May 19, 1993) (applying a minority
discount to wife‘s 11% ownership in a private family business in a divorce proceeding because
wife‘s sister controlled and owned 60% of the business).
14
Compare John C. Coates IV, “Fair Value” As an Avoidable Rule of Corporate Law:
Minority Discounts in Conflict Transactions, 147 U. PA. L. REV. 1251, 1273–74 (1999)
(―Whether measured against very small blocks that trade on the public stock markets daily or
against larger but noncontrol share blocks, control shares command premium prices.‖), with
James H. Eggart, Replacing the Sword with A Scalpel: The Case for A Bright-Line Rule
Disallowing the Application of Lack of Marketability Discounts in Shareholder Oppression
Cases, 44 ARIZ. L. REV. 213, 220 (2002) (―A minority discount accounts for the fact that a
minority interest, because it lacks the power to dictate corporate management and policies, is
worth less to third-party purchasers than a controlling interest.‖). See also Matthew D. Cain, Jill
E. Fisch, Sean J. Griffith & Steven Davidoff Solomon, How Corporate Governance is Made:
The Case of the Golden Leash, 164 U. PA. L. REV. 649, 657 (2016) (―[P]ublically traded shares
of firms with a controlling shareholder trade at a so-called ‗minority discount.‘ Because minority
shares in a controlled corporation lack the ability to influence the management of the firm, they
trade at a discount relative to other shares.‖) (citations omitted); Ronald J. Gilson & Jeffrey N.

33
legal systems depending on the extent of the protections that a particular legal system

provides to minority stockholders.15

On the facts alleged, one can reasonably infer that Party Y‘s offer was higher

because Party Y was seeking to acquire control and that the Anderson Family‘s offer was

lower because it took into account the family‘s existing control over the Company. It is

not possible to infer the exact amount of the premium or discount, because although it is

reasonable to regard Party Y‘s offer as an arms‘ length price for the Company as a whole,

the premium that the Anderson Family offered over the market price may have included

some sharing of the value otherwise attributable to the Anderson Family‘s block. Using

the two offers as guideposts, Party Y‘s offer of $4.21 per share for the whole company

represented a premium of $0.96 per share, or approximate 30%, over the Anderson

Family‘s offer of $3.25 per share for the minority. Put another way, the Anderson

Family‘s offer of $3.25 per share for the minority shares contemplated a discount of

Gordon, Controlling Controlling Shareholders, 152 U. PA. L. REV. 785, 787 (2003) (―[T]he
controlling shareholder secures value from its control position that is not received by the non-
controlling shareholders. In turn, the controlling shareholder can extract the same value from
control by selling it at a premium to the value of the non-controlling shares.‖).
15
See, e.g., Alexander Dyck & Luigi Zingales, Control Premiums and the Effectiveness
of Corporate Governance Systems, 16 J. APPLIED CORP. FIN. 51 (2004); Alexander Dyck & Luigi
Zingales, Private Benefits of Control: An International Comparison (Nat‘l Bureau of Econ.
Research, Working Paper No. 8711, 2002). Rafael La Porta, et al., Investor Protection and
Corporate Governance 14 & n.4 (July 27, 2000), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=183908; Luigi Zingales, The Value of the
Voting Right: A Study of the Milan Stock Exchange Experience, 7 REV. FIN. STUD. (1994);
Michael J. Barclay & Clifford G. Holderness, Private Benefits from Control of Public
Corporations, 25 J. FIN. ECON. 371 (1989). Other factors can affect control premiums, including
―an independent and widely circulating press, high rates of tax compliance, and a high degree of
product market competition.‖ Dyck & Zingales, Control Premiums, supra, at 53.

34
approximately 23% from the $4.21 that Party Y, a third-party purchaser, would pay for

the Company as a whole.

If the independent directors facilitated a grossly inadequate offer, then it might be

possible to infer that they acted in bad faith. If the amount of the minority discount was

extreme, then one might infer that the independent directors sought to serve the interests

of the controller, confident that stockholders focused on short-term gains would approve

any transaction at a premium to market. This is not such a case, because the bargained-for

consideration falls within a rational range of discounts and premiums.16 In other words,

the difference is not so facially large as to suggest that the Committee was attempting to

16
See, e.g., Wilmington Sav. Fund Soc’y, FSB v. Foresight Energy LLC, 2015 WL
7889552, at *9 n.3 (Del. Ch. Dec. 4, 2015) (―[A] number of studies have found that control
premia in mergers and acquisitions typically range between 30% and 50%.‖) (citing FACTSET
MERGERSTAT, CONTROL PREMIUM STUDY 1ST QUARTER 2012, at 2 (2012); Jens Kengelbach &
Alexander Roos, The Boston Consulting Group, Riding the Next Wave in M & A: Where Are the
Opportunities to Create Value? 10 (2011)); In re Southern Peru Copper Corp. S’holder Deriv.
Litig., 52 A.3d 761, 819 (Del. Ch. 2011) (applying a ―conservative‖ control premium of 23.4%,
which was the ―median premium for merger transactions in 2004 calculated by Mergerstat‖);
Prescott Gp. Small Cap, L.P. v. Coleman Co., 2004 WL 2059515, at *13 n.77, *28 (Del. Ch.
Sept. 8, 2004) (accepting as ―consistent with Delaware law‖ a control premium valuation range
of ―30 to 40 percent‖); Agranoff v. Miller, 791 A.2d 880, 900 (Del. Ch. 2001) (applying a 30%
discount to a comparable companies analysis to adjust for an implicit minority discount, noting
that the discount in the relevant market sector ―tended to be lower on average than that for the
entire marketplace‖); Kleinwort Benson Ltd. v. Silgan Corp., 1995 WL 376911, at *5 (Del.Ch.
June 15, 1995) (citing available premium data ranging from 34%–48%); see also Coates, supra
note 13, at 1274 n.72 (citing data for the period from 1981 through 1994, indicating that ―prices
paid in acquisitions by negotiated purchase or tender offer of control shares in public companies
exceeded the market prices for the targets‘ outstanding stock by an average of approximately
38%‖ and that during the same period, ―average prices paid in the same types of acquisitions of
large (>10%) but noncontrolling blocks of shares in public companies also exceeded market
prices for the targets‘ outstanding stock, but premiums for these noncontrol share blocks
averaged only 34.5%‖); Gary Fodor & Edward Mazza, Business Valuation Fundamentals for
Planners, 5 J. FIN. PLAN. 170, 177 (1992) (stating that control premiums paid for public
companies averaged 30% to 40% from the late 1960s to the late 1980s).

35
facilitate a sweetheart deal for the Anderson Family. The Committee instead was entitled

to consider the fact that the minority stockholders would be able to determine for

themselves whether to accept the Anderson Family‘s offer. When deciding on a course of

action, a board can ―take into account that its stockholders would have a fair chance to

evaluate the board‘s decision for themselves.‖ C&J Energy Servs., Inc. v. City of Miami

Gen. Empls.’ Ret. Tr., 107 A.3d 1049, 1070 (Del. 2014).

Appraisal acts as a further check on expropriation by the Anderson Family,

because when valuing the BAM shares in an appraisal proceeding, a court would exclude

any minority discount.17 That is why the Anderson Family insisted on an appraisal

condition and why the deal almost broke down over that issue. The Committee rationally

could have believed that if stockholders felt aggrieved over a price that implied a

minority discount, they could protect themselves by pursuing appraisal, and that if

enough stockholders exercised their appraisal rights, then the Anderson Family might

rely on the appraisal condition to back out of the deal. A minority of the minority thus

had the ability to influence the outcome of the transaction, although they lacked an

explicit veto right.

17
Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1145 (Del. 1989) (―The application of a
discount to a minority shareholder is contrary to the requirement that the company be viewed as
a ‗going concern.‘‖); see Paskill Corp. v. Alcoma Corp., 747 A.2d 549, 557 (Del. 2000)
(―[T]here can be no discounting at the shareholder level.‖); Rapid-Am. Corp. v. Harris, 603 A.2d
796, 804 (Del. 1992) (―[A] court cannot adjust its valuation to reflect a shareholder‘s individual
interest in the enterprise.‖). See generally Jesse A. Finkelstein & John D. Hendershot, Appraisal
Rights in Mergers & Consolidations, 38–5th C.P.S. § V(I), at A-65 (BNA) (―Delaware law
precludes the application of a minority discount in an appraisal proceeding at the stockholder
level.‖).

36
 There are other indications in the record that foreclose an inference of bad faith on

the part of the independent directors. To draw that inference, it would be necessary to

believe that the only rational course of action for the Committee was to reject the

Anderson Family‘s offer and not allow it to be presented to the stockholders. But the

$3.25 per share that was offered by the Anderson Family was 93% higher than the trading

price the day before the Anderson Family first proposed a merger, 23% higher than the

trading price the day before the Merger was announced, and 20% higher than the

Anderson Family‘s initial offer of $2.75, which the Committee rejected. The Committee

rationally could believe that stockholders might prefer liquidity at a premium to market.

In addition to explaining this rationale, the Proxy Statement identifies nine other bulleted

reasons, some with sub-bullets, why the Committee viewed the Merger favorably and

recommended it to the stockholders.

The allegations of the Complaint thus do not support a reasonable inference that

the Committee acted in bad faith. Nor does the Complaint offer any other reason to infer

that the members of the Committee were not disinterested or independent. The second

element of the M&F Worldwide framework is met.

C. The Committee’s Authority

The third requirement under M&F Worldwide is that ―the Special Committee is

empowered to freely select its own advisors and to say no definitively.‖ 88 A.3d at 645.

The plaintiffs do not contest this requirement. The Proxy Statement describes the

resolutions that granted the Committee the power to hire its own legal and financial

advisors, and the Committee exercised that authority by hiring King & Spalding, Morris

37
Nichols, and Houlihan Lokey. The Proxy Statement‘s description of the resolutions also

makes clear that the Board committed not to proceed with a transaction without a

favorable recommendation from the Committee. The third element of the M&F

Worldwide framework is met.

D. The Duty Of Care

The fourth requirement under M&F Worldwide is that ―[t]he Special Committee

meets its duty of care in negotiating a fair price.‖ 88 A.3d at 645. The standard of conduct

for the duty of care requires that directors ―inform themselves, prior to making a business

decision, of all material information reasonably available to them.‖ Aronson, 473 A.2d at

812. For purposes of applying the M&F Worldwide framework on a motion to dismiss,

the standard of review for measuring compliance with the duty of care is whether the

complaint has alleged facts supporting a reasonably conceivable inference that the

directors were grossly negligent.

The special committee in MFW met a total of eight times. It interviewed multiple

financial advisors before selecting a firm. It obtained up-to-date projections from

company management, then had its financial advisor prepare detailed financial analyses.

The committee did not seek third-party offers, but it had its financial advisor assess the

possibilities. The committee negotiated with the controller and achieved an increase in

the price from $24 per share to $25 per share. 67 A.3d at 515. The court observed that in

attacking the committee‘s process,

the plaintiffs make a number of arguments in which they question the
business judgment of the special committee, in terms of issues such as
whether the special committee could have extracted another higher bid

38
 from MacAndrews & Forbes if it had said no to the $25 per share offer, and
whether the special committee was too conservative in valuing MFW‘s
future prospects. These are the sorts of questions that can be asked about
any business negotiation, and that are, of course, the core of an appraisal
proceeding and relevant when a court has to make a determination itself
about the financial fairness of a merger transaction under the entire fairness
standard.

Id. at 516. The court rejected these arguments as bases for questioning whether the

directors complied with their duty of care, holding that ―[t]he record is clear that the

special committee met frequently and was presented with a rich body of financial

information relevant to whether and at what price a going private transaction was

advisable.‖ Id.

The Committee in this case met thirty-three times, negotiated with the Anderson

Family for over five months, sought alternative buyers for the whole company,

considered alternative transaction structures, rejected the Anderson Family‘s initial offer,

submitted two counteroffers, negotiated over non-economic terms, and obtained a sale

price 20% higher than the Anderson Family‘s initial offer. The resulting sale price was

more than 90% above BAM‘s closing price on the day before the Anderson Family

announced its bid. These facts do not support a reasonable inference that the Committee

was grossly negligent.

Once again, the plaintiffs focus on Party Y‘s offer as the linchpin of their

argument, suggesting that that the Committee was grossly negligent in accepting the

Anderson Family‘s offer when a higher offer was available. For reasons that this decision

already has discussed, the Committee could not force the Anderson Family to accept

Party Y‘s offer, nor was it in a position to take action against the Anderson Family to

39
facilitate Party Y‘s offer. Given those constraints, some might say that exploring potential

third-party actions was a vain act. In my view, however, the Committee‘s decision to do

so definitively undercuts any possible inference of gross negligence. Rather than only

negotiating with the Anderson Family or relying exclusively on the advice from Houlihan

Lokey, the Committee sought additional information in the form of third-party

expressions of interest. ―A decent respect for reality forces one to admit that [a financial

advisor‘s opinion] is frequently a pale substitute for the dependable information that a

canvas of the relevant market can provide.‖ In re Amsted Indus. Inc. Litig., 1988 WL

92736, at *7 (Del. Ch. Aug. 24, 1988) (Allen, C.), aff’d sub nom. Barkan v. Amsted

Indus., Inc., 567 A.2d 1279 (Del. 1989).

A committee can satisfy its duty of care by negotiating diligently with the

assistance of advisors. See MFW, 67 A.3d at 514–16. A committee goes one better when

it takes the additional step of gathering additional information through a market canvass.

Doing so in this case allowed the Committee to test the Anderson Family‘s conviction

about not being a seller. Having the offer in hand also helped the Committee negotiate,

because the offer would be a data point in any post-closing appraisal action, giving the

Anderson Family a reason to bump their offer to decrease the risk that dissenting

stockholders would seek appraisal.

As in MFW, the plaintiffs advance other arguments. They erroneously contend that

because BAM owned approximately $20 million in equity in its properties, the Anderson

Family only paid $600,000 for the rest of the business. That is incorrect. The Anderson

Family owned 57.6% of the Company, and the $21 million Merger value was only for the

40
shares that the Anderson Family did not already own. The plaintiffs also argue about

inputs in Houlihan Lokey‘s valuation analysis. Neither supports an inference of gross

negligence.

E. The Information Provided To The Minority Stockholders

The fifth requirement of M&F Worldwide is that ―the vote of the minority is

informed.‖ 88 A.3d at 645. The plaintiffs have never asserted any disclosure claims.

F. The Absence Of Any Coercion

The sixth and final requirement of M&F Worldwide is that ―there is no coercion of

the minority.‖ 88 A.3d at 645. The plaintiffs do not argue that there was.

G. The Operation Of The Business Judgment Rule

Once the elements of M&F Worldwide are met, the business judgment rule

provides the operative standard of review. ―Under that rule, the court is precluded from

inquiring into the substantive fairness of the merger, and must dismiss the challenge to

the merger unless the merger‘s terms were so disparate that no rational person acting in

good faith could have thought the merger was fair to the minority.‖ MFW, 67 A.3d 496 at

500. ―[It is] logically difficult to conceptualize how a plaintiff can ultimately prove a

waste or gift claim in the face of a decision by fully informed, uncoerced, independent

stockholders to ratify the transaction.‖ Huizenga, 751 A.2d at 901. By definition, at that

point, rational people who were members of the minority thought the merger was fair.

In M&F Worldwide, Chief Justice Strine, then Chancellor, held that the evidence

presented failed to ―raise a triable issue of fact under the business judgment rule‖ where

―[t]he merger was effected at a 47% premium[,] . . . [a] financial advisor for the special

41
committee found that the price was fair in light of various analyses,‖ and ―[a]fter

disclosure of the material facts, 65% of the minority stockholders decided for themselves

that the price was favorable.‖ MFW, 67 A.3d at 519. In this case, the Merger provided the

minority stockholders with a 90% premium, Houlihan Lokey opined that it was fair, and

after disclosure of the material facts, 66.3% of the minority stockholders approved it.

It is not possible to infer that no rational person acting in good faith could have

thought the Merger was fair to the minority. The only possible inference is that many

rational people, including the members of the Committee and numerous minority

stockholders, thought the Merger was fair to the minority.

III. CONCLUSION

The Merger satisfied the M&F Worldwide framework. The Complaint is dismissed

with prejudice.

42