2.1. Recent judicial developments
Freeze-outs are generally subject to “entire fairness” review by the Delaware courts, a
stringent standard of review, because of their self-dealing nature (self-dealing because the
controller is the buyer and typically dominates the seller’s board). Even procedural protections
such as the use of a special committee or a MOM condition only serve to shift the burden of
proof on entire fairness to the plaintiff.4 In June 2001, however, the Delaware Chancery Court
held in In re Siliconix Inc. Shareholders Litigation5 that entire fairness review does not apply to
tender offer freeze-outs, “unless actual coercion or disclosure violations are shown,” because the
Delaware corporate code does not provide a statutory role for the target board in such an offer.
Just one month after Siliconix, the Delaware Supreme Court held in Glassman v. Unocal
Exploration Corp.6 that a short-form merger is also not subject to entire fairness review. Taken
together, Siliconix and Glassman allow a controlling shareholder to avoid entire fairness review
by executing its freeze-out as a tender offer followed by a short-form merger.7 The result is that
the Delaware courts now afford different standards of judicial scrutiny to transactional forms that
achieve the same result in practice, namely, the elimination of the minority shareholders.8
4 Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110 (Del. 1994); Rosenblatt v. Getty Oil, 493 A.2d 929 (Del. 1985).
5 6 7 2001 WL 716787 (Del. Ch. 2001). 777 A.2d 242 (Del. 2001). See, e.g., Next Level Communications Scheduled 14D-9 (filed Jan. 23, 2003) (“Q: Why would Motorola launch an unsolicited tender offer, as opposed to discussing the matter and negotiating with Next Level’s Board of Directors? A: By making a tender offer directly to stockholders, Motorola is attempting to avoid having to negotiate with Next Level’s Independent Directors, who have a fiduciary responsibility to protect you. . . . Under Delaware case law, if Motorola were to negotiate a transaction agreement with the Independent Directors, Motorla would have a legal duty to deal ‘fairly’ with the minority stockholders and to pay a ‘fair price’ for your shares. Through the unsolicited tender offer, Motorola is trying to avoid its legal duty to pay you a fair price for your shares in any negotiated transaction and to treat you fairly as minority stockholders.”).
8 Abramczyk, Cincilla & Honaker (2003) and Wolfe (2002) argue that the result in Siliconix was dictated by the 1996 case Solomon v. Pathe Communications, in which the Delaware Supreme Court held that a tender offer made by a controlling shareholder was not subject to entire fairness review. However, Gilson & Gordon (2003) point out that Solomon was not a freeze-out situation and therefore could have been limited to its facts. Aronstam, Balotti & Rehbock (2004) add that the standard of review for the back-end short-form merger was only resolved by Glassman.