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Delaware court upholds Perelman-M&F ruling, may alter buyouts

Ronald Perelman speaks after he received his award during the Elton John AIDS Foundation's 12th Annual "An Enduring Vision" benefit gala at
Ronald Perelman speaks after he received his award during the Elton John AIDS Foundation's 12th Annual "An Enduring Vision" benefit gala at

By Tom Hals

(Reuters) - Ronald Perelman's buyout of a company he controlled was not subject to heightened court review because the billionaire acted as if he were an outside buyer, according to a Delaware Supreme Court ruling that could affect future insider deals.

Friday's opinion could prod Wall Street dealmakers to follow Perelman's process for buying out the minority shareholders of M&F Worldwide Corp, a company in which his holding company owned 43 percent of the stock.

"MFW will incentivize those who structure such transactions to make sure they are done properly and replicate third-party deals. And that's a good thing for stockholders," said Tariq Mundiya who argued the case for the M&F's special committee.

The Supreme Court of Delaware, whose law governs most U.S. companies, said in a 39-page opinion by Justice Randy Holland that the M&F deal process created "a countervailing, offsetting influence" against Perelman. As a result, the deal would not be subject to a thorough court review.

Perelman premised his 2011 proposal to acquire all of M&F's outstanding stock on approval by a special committee of independent M&F directors and a majority vote by its minority shareholders.

Perelman initially offered $24 per share, although the committee eventually agreed to $25, a premium of nearly 50 percent to the pre-offer stock price. The deal was approved by 65 percent of M&F's minority shareholders.

Mergers are reviewed by courts if a shareholder sues, which happens on almost every deal. The M&F buyout was a particularly attractive target for shareholder attorneys.

That's because Delaware law would normally put the burden on M&F's board to prove the buyout process and price were both fair, a demanding test known as entire fairness.

Perelman won early dismissal of the lawsuits last year by convincing the lower Court of Chancery judge handling the case, Leo Strine, to apply the "business judgment" standard to the buyout.

That standard assumes the board acted properly and puts the burden on shareholders to prove the special committee was not empowered to say no to Perelman or that its directors were conflicted.

"There is a whole business on the plaintiffs side looking for these type of cases and suing, knowing there was settlement value," said Brian Quinn, a professor a Boston College Law School. He said the ruling "markedly" diminished settlement value of these cases.

Quinn said he still expected shareholders to review such buyouts and look for signs that a controlling shareholder ran a sham process, for example by stuffing a supposedly independent committee with relatives or friends.

But Quinn added that the ruling was favorable for companies that follow the procedures used by M&F. "It means those transactions will go through and won't be held up by not very strong lawsuits," he said.

Carl Stine, a Wolf Popper attorney who represented the investors, did not immediately respond to a request for comment.

The case is Alan Kahn et al v M&F Worldwide Corp et al, Supreme Court of Delaware, No. 334,2013.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Tom Brown)

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