Standards of Review in Conflict Transactions: an Examination of Decisions Rendered on Motions to Dismiss
Lewis H. Lazarus
This article examines how the standard of review affects decisions by Delaware courts on motions to dismiss in conflict of interest transactions, focusing on decisions since Weinberger. The standard of review at the motion to dismiss stage significantly affects the likelihood of success. Part I discusses the differences between a third-party merger transaction and a self-interested merger transaction. Part II discusses the standard of review for a motion to dismiss under Delaware law. Part HI is an evaluation of third-party and self-dealing transactions, which determines that motions to dismiss will likely succeed in third-party transactions because the business judgment rule applies and that motions to dismiss self-dealing transactions will likely be denied because entire fairness applies. Part IV discusses the case law since Weinberger and concludes that the availability of appraisal will not necessarily eliminate the defendant’s burden of proving entire fairness in a cash-out merger, the standard of review depends upon whether the complaint pleads interested transactions not approved by disinterested and independent directors and shareholders, a motion to dismiss likely will succeed absent well-pleaded allegations that board members are not disinterested and independent, uncoerced stockholder approval on full disclosure provides grounds for dismissal, and a controlling stockholder who bargains and receives the same treatment in a cash-out merge as a minority stockholder may still be required to demonstrate entire fairness. In Part V the author argues that the interest of corporations and their shareholders are best served by boards whose members include well motivated, disinterested and independent directors who accept responsibility for recommending or approving transactions with interested directors or controlling shareholders.