Should conflicted merger transactions be subject to different standards of review simply because the mergers have been structured differently? The answer is evident if we examine the balance of control between a corporation’s shareholders and its board of directors in this context. My Note addresses the varying standards of review that currently exist for analyzing conflicted mergers, and calls for their unification.
Companies merge for a variety of reasons: when they expect increased profits, anticipate a better competitive position, or simply wish to diversify their products and services. The myriad methods of negotiating these merger transactions help to maximize the derived benefit. Delaware merger doctrine has evolved to accommodate the complexities of these transactions by allowing courts to review differently-structured mergers under different standards of review.
However, a closer analysis reveals that the threat of an underlying conflict of interest between a corporation’s board of directors and its shareholders is evident in all conflicted mergers, regardless of how such transactions are structured. A uniform, intermediate standard of review, as articulated in Unocal[1]and Revlon,[2] recognizes and appropriately addresses this underlying conflict of interest.
The intermediate standard of review has often been used as part of a two-step analysis: if the board fails under the enhanced scrutiny review, it is then required to show that the transaction was entirely fair to the shareholders. On the other hand, if the board passes intermediate scrutiny, its actions are reviewed under the more lenient business judgment rule.
My Note proposes applying this intermediate enhanced scrutiny standard as a one-step review for conflicted transactions. By doing so, this Note does not suggest disregarding the developments in this area of law over the past thirty years. Rather, it argues that the Delaware courts’ analyses of conflicted transactions should be viewed as applications of the enhanced scrutiny standard itself.
My Note is forthcoming in Vol. XXII of the Journal. I look forward to your comments.
[1] Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
[2] Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
