In re John Q. Hammons Hotels, Inc.: A New Roadmap for Conflict Transactions?
In the seminal case of Kahn v. Lynch Communication Systems, Inc., the Delaware Supreme Court settled the debate regarding the standard of review applicable to transactions in which a controlling stockholder "stands on both sides" of a transaction, such as a minority squeeze-out transaction, holding that the entire fairness standard of review applies ab initio to such transactions. Lynch and its progeny left unanswered, however, the question whether and to what extent the reasoning that animated those decisions would apply to a situation in which a controlling stockholder did not "stand on both sides" of the transaction, but instead utilized its control position (and power to veto a transaction) to negotiate with a third-party acquiror for different (and perhaps greater) consideration than that received by the minority stockholders. In a recent decision, captioned In re John Q. Hammons Hotels, Inc. Shareholder Litigation, the Delaware Court of Chancery considered that question and determined that, absent robust procedural protections, the entire fairness standard of review would apply to such a transaction. Importantly, the Court concluded that, unlike in Lynch, the business judgment standard of review could be invoked as the applicable standard of review in the circumstances at issue in Hammons if the transaction were both (i) recommended by a disinterested and independent special committee, and (ii) conditioned on the approval by the affirmative (and non-waivable) vote of the holders of a majority of the voting power of all outstanding unaffiliated shares.