In Re CNX Gas Corp. Shareholders Litigation
2010 WL 2349097, 2010 Del. Ch. LEXIS 119, 4 A.3d 397 (2010)
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Rule of Law:
A controlling stockholder's two-step freeze-out transaction (tender offer followed by a short-form merger) is reviewed under the entire fairness standard unless it is conditioned on both the affirmative recommendation of a fully empowered, independent special committee and the approval of a majority of the unaffiliated minority stockholders.
Facts:
- CONSOL Energy, Inc. ('CONSOL') was the controlling stockholder of CNX Gas Corporation ('CNX Gas'), owning approximately 83.5% of its common stock.
- CONSOL decided to acquire the remaining public shares of CNX Gas in a freeze-out transaction.
- Before launching a public tender offer, CONSOL negotiated a price of $38.25 per share with T. Rowe Price, the largest minority stockholder, and secured a tender agreement obligating T. Rowe Price to sell its shares.
- T. Rowe Price held a significant ownership stake in CONSOL, creating a potential conflict of interest as its economic interests were hedged between the two companies.
- After the T. Rowe Price deal was announced, the CNX Gas board formed a one-person Special Committee, comprised of its sole independent director, John Pipski, to evaluate CONSOL's forthcoming offer.
- The CNX Gas board initially granted the Special Committee limited authority, withholding the power to negotiate the offer's terms, explore alternatives, or deploy defensive measures like a rights plan.
- Although the board later granted negotiating authority just before a required filing was due, CONSOL refused to increase its offer price.
- The Special Committee ultimately chose to remain neutral and did not recommend the tender offer to the minority stockholders, citing concerns about the process and CONSOL's unwillingness to negotiate.
Procedural Posture:
- Representatives of a putative class of minority stockholders of CNX Gas ('plaintiffs') filed a lawsuit in the Delaware Court of Chancery.
- The suit was filed against CONSOL, CNX Gas, and the members of the CNX Gas board of directors.
- The plaintiffs challenged CONSOL's tender offer to acquire the remaining shares of CNX Gas, which was to be followed by a short-form merger.
- Plaintiffs moved for a preliminary injunction to prevent the tender offer from closing.
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Issue:
Does a controlling stockholder's two-step freeze-out transaction, structured as a tender offer followed by a short-form merger, require review under the entire fairness standard when it is not conditioned on both the affirmative recommendation of an independent special committee and the approval of a majority of unaffiliated stockholders?
Opinions:
Majority - Laster, Vice Chancellor
Yes, the transaction is subject to review under the entire fairness standard. For a controlling stockholder freeze-out to receive the deferential business judgment rule standard of review, it must replicate an arms-length transaction by including two key procedural protections: (1) negotiation and affirmative recommendation by a fully empowered special committee of independent directors, and (2) approval by a majority of the unaffiliated minority stockholders. In this case, neither protection was effectively implemented. First, the Special Committee did not affirmatively recommend the transaction; it remained neutral due to concerns about the process. Second, the Special Committee was not granted the full authority of a board in a third-party transaction, such as the power to seek alternatives or use a rights plan, which deprived it of meaningful leverage. Third, the majority-of-the-minority condition was undermined by CONSOL pre-negotiating and securing a tender agreement with T. Rowe Price, the largest minority holder, whose significant cross-ownership in CONSOL created conflicting incentives. The failure to satisfy these conditions triggers the entire fairness standard of review.
Analysis:
This opinion is legally significant for championing a 'unified standard' for reviewing all controlling stockholder freeze-outs, seeking to resolve the doctrinal tension between the harsher 'entire fairness' review for negotiated mergers (under Kahn v. Lynch) and the more lenient standard for two-step tender offers (under In re Siliconix). By applying the dual-protection framework from In re Cox Communications, the court raises the bar for controllers seeking to avoid entire fairness review in a tender offer context. The decision signals a shift toward greater minority stockholder protection by requiring transaction structures to fully emulate an arms-length process, effectively giving special committees more leverage and subjecting more freeze-outs to Delaware's most stringent standard of judicial review.
